Snow Backs Mortgage Oversight
Treasury Secretary John W. Snow on Wednesday told Congress that Fannie Mae and Freddie Mac, the largest buyers of U.S. mortgages, need tougher oversight and suggested that his department become their regulator.
In three hours of testimony, Snow urged Congress to create a new government agency to monitor and supervise the companies’ finances, including their total $1.5 trillion in debt.
The proposed crackdown, aimed at allaying investor concerns that the giant firms pose risks to financial markets, follows Freddie Mac’s June announcement that it would restate earnings for the last three years by as much as $4.5 billion.
“The supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,” Snow told the House Committee on Financial Services.
Lawmakers have criticized the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, for failing to anticipate Freddie Mac’s accounting controversy.
While Snow said the Bush administration “would be willing to support proposals” to house a new regulatory agency at the Treasury, he mainly focused on powers a new regulator should have.
He recommended that the new watchdog be able to review the activities of the firms, evaluate new financial products they offer and have the right to liquidate assets or order a winding down of operations.
Freddie Mac and Fannie Mae own or guarantee 42% of the $7 trillion U.S. mortgage market. While publicly owned, the companies were chartered by the government decades ago to encourage lending for home ownership. They profit from the spread between the rates they pay to borrow money and the rates they earn on the mortgages they buy.
Congress has waited for Snow’s views before drafting new oversight regulations.
David Dreman, who heads Dreman Value Management in Jersey City, N.J., and is a longtime owner of Freddie Mac shares, said moving regulation of the firms to the Treasury would be “very good” for the firms because it would give “investors more confidence Fannie and Freddie will be well watched.”
Other investors have feared that the government might force the companies to sharply raise their capital reserves, which could depress earnings.
The stocks slid Wednesday amid a broad market decline. Fannie Mae fell $1.62 to $66.74 while Freddie Mac lost $2.04 to $53.40. Both trade on the New York Stock Exchange.
