- The Washington Times - Friday, September 12, 2003

Mortgage giants Freddie Mac and Fannie Mae may soon face tighter regulations. A plan floated by the Bush administration seeks to bolster oversight without hurting the companies’ ability to drive brisk homebuying — a catalyst for economic activity, particularly now. The proposal strikes the right balance.

Freddie and Fannie own or guarantee 42 percent of the nation’s $7 trillion mortgage market and are among the four largest U.S. financial institutions. When a July report by outside investigators uncovered improper accounting at Freddie Mac, policy-makers and investors became concerned about the company’s ability to cause economic shock.

The exceptional growth of Freddie and Fannie has been generated primarily by their special treatment by government. This treatment has allowed homebuying in America to become easier. It has also insulated the companies from many free-market pressures, making effective government oversight important.

Both companies buy mortgages from banks and savings and loans. They also sell some mortgages as financial securities they guarantee, known as mortgage-backed securities. The companies’ activity has made the U.S. mortgage market extremely liquid, thereby making home financing cheaper in America.

Freddie and Fannie enjoy an implicit guarantee from the government, meaning investors believe they are backed by the federal government, although this guarantee is not explicit. They are exempt from state and local taxes and some disclosure requirements placed on other publicly traded companies.

Under the administration’s plan, which Treasury Secretary John W. Snow announced to Congress on Wednesday, Treasury would take over the regulatory beat from the Office of Federal Housing Enterprise Oversight (OFHEO). This change is necessary, given OFHEO’s slow reaction to the troubles at Freddie. On Jan. 22, Freddie announced it would be restating its earnings for the past three years, and on March 25 said the restatement would reflect earnings volatility. OFHEO didn’t say until June 4 that accounting irregularities and employee misconduct were discovered during a re-audit.

The proposal would give Treasury greater latitude in regulating the companies risk-based capital standard, or how much capital Freddie and Fannie should have to withstand volatility. Treasury would be given oversight over any new financial products the companies roll out. Also, the White House no longer would appoint directors to boards of either institution.

Given the companies’ quasi-public status, the administration is right in calling for greater regulation. Seeing a company the size of Freddie Mac’s totter with financial malpractice is unnerving enough. When coupled with lax oversight, action is called for.

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