- The Washington Times - Sunday, February 15, 2004

The Federal Reserve recently severed a link between the government and mortgage giants Freddie Mac and Fannie Mae when it announced it would phase out its practice of giving the companies day-long interest-free loans by 2006.

The Fed’s move isn’t expected to have a significant material impact on Freddie and Fannie when it becomes effective, but it does signal to investors that Fed officials believe some of Freddie and Fannie’s special benefits should be scaled down. Federal Reserve Chairman Alan Greenspan “strongly recommended” an effective regulator for Freddie and Fannie with a control capacity on their capital requirements. Both Freddie and Fannie have come under heightened scrutiny by Congress and the Bush administration after making serious accounting errors. Congress is expected to pass a new law on how to regulate the companies as early as next month.

Freddie and Fannie buy mortgages from banks and savings and loans. They repackage some of those mortgages and sell them as securities, known as mortgage-backed securities. In 1970, Congress gave Freddie Mac its charter, and Fannie Mae completed its transformation from a public entity to a government-sponsored private company.

Given their government charter, the companies face less stringent disclosure requirements than other publicly traded companies, and are widely, if erroneously, believed to be guaranteed by the government against default. The companies are among the four largest financial institutions in America. Some analysts fear their advantages have allowed the companies to become large enough to pose a potential threat to the economy if they were to collapse. These concerns have been given added importance by the Fed’s latest announcement and Mr. Greenspan’s statements. Still, legislators must also consider the important role these companies have played in making the mortgage — and therefore the housing — market more liquid and dynamic. Players in the housing market want to ensure that at least some of the regulatory authority remains with the government entity that already has housing expertise — the Department of Housing and Urban Development. While it is clear that oversight does need to be strengthened, this continues to sound like a reasonable proposal.

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