Fannie Mae: Contrition is free
(Index of my Fannie Mae blog posts here.)
At today’s Senate Banking Committee hearing, the big GSEs (Fannie Mae and Freddie Mac) will seek to cooperate with the inevitable (tougher regulation) but stave off draconian subservience to a proposed new Federal Housing Finance Agency director and sharp limits on their ability to grow their balance sheets and expand their subsidy ($23 billion last year alone, according to CBO) by saying:
“Yes, we’re very sorry.”
“Fannie Mae understands that we have disappointed a lot of people,” Fannie Mae’s interim chief executive, Daniel H. Mudd, plans to tell the Senate Banking Committee, according to a copy of the written testimony the company gave lawmakers yesterday. It will be the company’s first congressional testimony since its board ousted Franklin D. Raines as chief executive in December.
“We must . . . rebuild relationships with our regulators, partners, stakeholders and Congress,” he plans to say.
“Yes, you should certainly regulate us.”
Fannie Mae and Freddie Mac plan to tell Congress today that they support the idea of a stronger, independent federal regulator to oversee them …
“But heavens no, please don’t regulate us much more.”
… but oppose several key provisions in pending legislation [HR 1461; more on this in future posts; it's a doozy of a proposal! -- Ed.] intended to rein them in following multimillion-dollar [billion -- Ed.] accounting and recordkeeping errors [like 'false signatures' -- Ed.] over the past two years, according to documents and sources familiar with the testimony.
Executives for the two mortgage finance companies intend to say they oppose provisions that would:
1. Restrict the total value of the mortgages they hold for their own portfolios
2. Require each company to seek regulatory approval before offering new products
3. Force the new regulator to define in detail what areas of the mortgage market the two companies can do business in.
“Regulate us, please, but don’t limit what business we can do or how much interest-rate and prepayment risk we can take.”
Freddie Mac’s chief executive, Richard F. Syron, plans to tell lawmakers that the companies serve a valuable purpose in keeping home loan money plentiful but that the regulatory structure is inadequate. He will argue, however, against putting limits on either company’s portfolio.
“I agree with my alleged duopolist.”
Fannie and Freddie mostly make money by buying home loans from banks and other lenders and bundling them into securities that are sold to investors on Wall Street — a process that keeps the original lenders supplied with cash to make new loans.
This approach fulfills the Congressional purpose but limits the Federal risk (and, not coincidentally, reduces the companies’ profit margins).
But over the past decade, the companies also have built a $1.5 trillion portfolio of mortgages and mortgage-backed securities that they hold onto
Holding onto mortgages rather than immediately securitizing them with like-term instruments increases the Federal risk, increases the Federal subsidy, and not coincidentally, increases the GSEs’ profits. As CBO states:
The Congressional Budget Office (CBO) estimates that the total federal subsidy to the three housing government-sponsored enterprises (GSEs) rose to $23 billion in 2003, an increase of nearly 70 percent over the $13.6 billion in 2000 that CBO reported in its May 2001 study. That jump in the value of the subsidy stems from the enterprises’ rapid expansion during 2001.
Actually, nobody quite knows how big the implicit subsidy is — depending on how the GSEs work their balance sheets in the future, it could be twice as big:
Those estimates are based on the assumption that any increase in the GSEs’ outstanding debt and mortgage-backed securities (MBSs) are sustained only until the acquired mortgages mature. Under an alternative assumption that the GSEs’ issued debt and MBSs are reissued when they mature, the federal subsidy for 2003 would be over $46 billion, up from about $20 billion in 2000. CBO’s current analysis, which relies on the same methodology used for its earlier study, comes to essentially the same conclusions as a recent study by a Federal Reserve economist: the GSEs receive substantial subsidies and a significant portion of them is not passed through to borrowers.
Meanwhile, the GSEs will stick to their initial line:
The prepared testimony … strikes what sources familiar with the document described as a deliberately contrite tone.
Sincerity is the key, said
“I can’t afford to die; I’d lose too much money.”
