- The Washington Times - Sunday, October 3, 2004

Fannie Mae’s newly discovered accounting artifices could give lagging reform efforts in Congress some impetus. Mortgage giants Fannie Mae and Freddie Mac are financial behemoths and political sacred cows — escaping much needed oversight because of their role in making housing more affordable. Attempts in Congress to regulate the companies more vigorously have been caught in legislative logjams, with Democrats acting as the more unmovable force.

Fannie and Freddie, both government- sponsored entities, own or guarantee nearly half of the country’s $7 trillion market for U.S. mortgages. The companies help lower mortgage rates by making the market more uniform and liquid. That role has given them a political tincture — they enjoy special regulatory exemptions and some of their board members are appointed by the president. Both companies have an implicit, but not explicit, guarantee on their liabilities from the federal government.

Accounting problems at both firms have raised alarm in the financial community, and Federal Reserve Chairman Alan Greenspan has repeatedly called for regulatory reform. Last month, Fannie’s regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), said Fannie had deferred $200 million in estimated expenses in 1998, apparently to boost its earnings — not to mention executive bonuses. Such a move by Franklin D. Raines — Fannie’s chief executive and a long-time Democrat — to obfuscate expenses is particularly troubling given the privileges the government-sponsored entity enjoys. The SEC is also investigating Fannie’s accounting.

Almost two years ago, Freddie’s own board discovered that the company’s management was using creative accounting to smooth earnings. Given the size of Fannie’s and Freddie’s mortgage holdings, any crisis involving either company would have a profound impact on the economy. Both companies face less market competition than other financial entities — primarily due to their implicit government guarantees — and therefore have few competitors to check their size. Both are subject to less scrutiny than other financial institutions.

A House Financial Services subcommittee will hold a hearing on regulating Fannie and Freddie on Wednesday. The companies’ regulator should be given greater authority in setting capital requirements to ensure the companies are properly insulated from potential interest-rate risk. Also, these institutions should be regulated more like banks, and shouldn’t be given advance warning about which accounting areas they will be tested on, which has been the prevailing practice.

The roles of Fannie and Freddie in helping to make housing more affordable remain important, and Congress should be even-handed in reforming their regulation. Congressional Democrats could pay a serious price if they maintained the companies’ privileges at the expense of the health of the overall economy.

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