Feeble Mortgage Oversight

Few Americans know a Freddie Mac from a Fannie Mae. But homeowners and buyers know they want 100% confidence in the finances underlying their mortgages and the red-hot housing market.

With Freddie Mac, the home mortgage giant, firing its executives and admitting its accounting was wrong, stronger government oversight over these quasi-public enterprises is clearly necessary.

Freddie Mac was created by the federal government in 1970; Fannie Mae dates back to 1938. Together, these agencies are credited with helping turn the dream of homeownership into a reality for millions of lower-income households.

But critics now see the two in a more negative light, especially since Freddie Mac was forced to restate its earnings for the last three years because of the way it offset risk with complex financial instruments. Freddie Mac insists this scandal will subside swiftly and Fannie Mae assures anxious investors that its accounting remains solid.

Even those who trust such statements would like them verified. There’s a quick way to calm jittery investors and protect taxpayers from a potentially expensive savings-and-loan-style bailout: Make these two institutions meet the stringent financial reporting standards that govern other publicly traded financial companies.

That would force the institutions to thoroughly explain the increasingly complicated ways that they balance the risk of buying and guaranteeing home mortgages.

Fed Chairman Alan Greenspan approves of the idea. So does Securities and Exchange Commission Chairman William H. Donaldson, who wants the government-sponsored enterprises to be “role models for disclosure.”

Although both are traded publicly (Freddie Mac on the New York Stock Exchange, Fannie Mae on Nasdaq), Congress let the two ignore SEC financial reporting rules. Washington a decade ago created the Office of Federal Housing Enterprise Oversight to regulate Fannie and Freddie. But the Freddie Mac mess caught the regulators off guard, little surprise considering the number and complexity of the deals they were supposed to watch with a relatively spare budget and staff.

Congress should legislate stronger oversight, by the Treasury Department and the Federal Reserve.

Freddie Mac and Fannie Mae enjoy an important edge in the financial markets because investors perceive that Uncle Sam won’t let them fail. This lets them borrow money at a lower cost than competitors. In exchange for this, Congress should protect taxpayers and homeowners from even a whiff of fiscal skulduggery.