We've all read recently about proposed legislation to strengthenthe regulation of Government Sponsored Enterprises (GSEs). Theincreased oversight either by an agency of the Treasury Departmentor an independent super agency will, we are told, ensure the safetyand soundness of Fannie Mae and Freddie Mac, even in the worstmarket conditions. I am not sure we're hearing the complete story.Fannie Mae and Freddie Mac have been around for so long that manyin the mortgage lending business may not know or recall why theywere established. Both GSEs were chartered to purchase mortgageloans from private lenders, such as mortgage bankers, banks,S&Ls, and credit unions. Prior to the emergence of Fannie Maeand Freddie Mac, mortgage lenders often went through periods ofloan droughts, i.e., funds were not available to borrowers tofinance the purchase of homes. Fannie Mae and Freddie Mac werechartered to establish a secondary marketing cycle to purchaseloans, thereby replenishing lenders' capital to make more loans andavoid loan droughts. Since 1996, Navy Federal has sold over $17billion in mortgage loans to Fannie Mae, Freddie Mac and otherlenders. Being able to participate in the secondary market hasallowed us to aggressively offer mortgage lending products to ourmembers while maintaining available capital for our other robustlending products, such as automobile loans and credit cards, whichNavy Federal does not sell. These two secondary marketing entitieshave been extremely successful at helping fuel the rise inhomeownership over the past 30 years. They have offered manyinnovative new loan products and both have taken the lead intechnological advances, which have allowed lenders to serve theirborrowers more efficiently (e.g., automated underwriting systems).So if Fannie Mae and Freddie Mac have been so successful, why allthe clamor to keep a closer eye on them? Recent disclosures aboutaccounting irregularities at Freddie Mac and a miscalculation offigures under a new accounting standard by Fannie Mae have providedimpetus for the most recent push for greater oversight. We, in thecredit union movement, along with our brethren in the bankingindustry, are well accustomed to dealing with our regulators onmatters of capital reserves and allowances for loan losses.Everyone recognizes that the financial soundness of Fannie Mae andFreddie Mac is critical to the continued well-being of the housingand securities markets. But Fannie Mae and Freddie Mac are notEnron or WorldCom. Their reserve requirements may need to berevisited, but this piece of the debate should be separated fromthe goal of those who want to reduce Fannie Mae's and Freddie Mac'sability to fulfill their charters effectively. Since the 1980s, wehave heard cries from a vocal minority of very large financialinstitutions, politicians and some government officials who claimFannie Mae and Freddie Mac have an unfair competitive advantagebecause of their implied line of credit to the Treasury. Thebiggest opponents of Fannie Mae and Freddie Mac are the financialinstitutions who make up an organization called FMWatch. FMWatchhas a vested interest in seeing that Fannie Mae and Freddie Mac areconstrained and over-regulated. When this group, and thepoliticians who promote their views, were unsuccessful in arguingthat Fannie Mae and Freddie Mac are unfair competitors, they jumpedon the recent accounting missteps to accomplish their goal ofneutering the two secondary marketing leaders. If they aresuccessful, the door may open to permit these institutions to crowdout Fannie Mae and Freddie Mac. If the role of Fannie Mae andFreddie Mac are diminished, there is no question in my mind thatthe price of mortgage lending for credit union members and allmortgage borrowers will increase. Fannie Mae and Freddie Macstockholders have benefited from their successes, but both GSEshave a public mission to help Americans realize their dream ofhomeownership. The folks at FMWatch have only the best interests oftheir stockholders at heart, not the average American homebuyer.Fannie Mae and Freddie Mac are private concerns with a public,social mission. The institutions comprising FMWatch are out tosteal the model established by Fannie Mae and Freddie Mac andrecast it for their own benefit. What would happen if the role ofFannie Mae and Freddie Mac in mortgage lending and the secondarymarket was greatly reduced or turned over completely to the privatesector - to institutions such as those who comprise FMWatch? Asalready stated, we would see increased costs for mortgagefinancing. Second, creative and innovative programs developed byfinancial institutions in consort with Fannie Mae and Freddie Macwould be stifled. Don't forget that many of the creative andinnovative programs developed by Fannie Mae, Freddie Mac andlenders serve low-income borrowers. Third, selling loans in thesecondary market would become much more difficult. I have dealtwith jumbo loan investors over the years, including some who belongto FMWatch. I have found many to be arrogant and inflexible. Thesefinancial institutions charge very high premiums for borrowers, whodo not strictly fit to their profiling models (none of their modelsgive credit to long-term, good credit union member relationships).These investors want to cherry-pick only the very best loans. Theymay buy a less-than-perfect loan, but it will cost you dearly. Anddon't be surprised if you are asked to repurchase a loan at thefirst sign of trouble. Fannie Mae and Freddie Mac have helpedestablish a secondary market that works extremely well replenishingmortgage capital and is efficient in ensuring reasonable prices formortgage loans. Both of these GSEs have taken the lead ininnovative mortgage products so that an increasing number ofAmericans can achieve the dream of homeownership. Fannie Mae andFreddie Mac have helped lead the way in making our mortgageoperations more efficient through the use of technology. I have noproblem with re-assessing the capital reserve requirements ofFannie Mae and Freddie Mac; that's the same thing NCUA does with mycredit union every year. However, I am very cynical of thosefinancial institutions and politicians, who have a hidden agenda todiminish the role and effectiveness of Fannie Mae and Freddie Macbecause their agendas could jeopardize a secondary marketing systemthat has worked so well for so long.

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