Scrutinizing the Big Lenders
Congress created the federal mortgage lenders Fannie Mae and Freddie Mac decades ago to help spread the American dream of homeownership among households that otherwise would be priced out of their markets, especially scorching, impossible ones like Southern California’s. But a recent study by the Federal Reserve casts doubt on whether the two institutions consistently use their huge sway to benefit lower-income households. The Fed economist who wrote the report maintained that Freddie Mac and Fannie Mae employ the financial edge they gain from their close ties to the U.S. government to enrich their private shareholders at the expense of would-be homeowners.
That’s welcome ammunition for critics who demand tougher oversight of the two institutions.
Freddie Mac and Fannie Mae, which together own $1.5 trillion in assets and dismiss the Dec. 22 Fed report as unsound, are powerful forces in the home loan and construction industries. But their history and business dealings are complicated, so a bit of the past is in order: Fannie Mae (created by Congress in 1938) and Freddie Mac (1970) initially were government-sponsored entities, relying on the federal government’s treasury to calm investors in rough times. They helped broaden homeownership to millions of lower-income households.
Years ago, they turned into publicly traded companies, a transition that supposedly cut their ties to Uncle Sam’s treasury. Yet many investors still believe he won’t let these titans fail. That faith gives the firms the ability to borrow at a cheaper rate than private companies. There’s nothing wrong with Freddie Mac and Fannie Mae benefiting from that edge -- if the savings produce more affordable housing for poorer households and don’t just line shareholders’ pockets.
Lawmakers and the Bush administration should support efforts to better oversee the companies’ complex, sophisticated fiscal dealings. The most direct route: Transfer oversight of Freddie Mac and Fannie Mae from a little-known regulatory office in the Department of Housing and Urban Development to the Treasury Department, which has the financial savvy to regulate these firms.
Last year, even as Los Angeles home prices skyrocketed to a just-announced December median of $345,000 -- forcing buyers to resort to desperate means, distances and properties -- Freddie Mac was forced to disclose accounting irregularities that led to a management shake-up and a $125-million penalty. Fortunately, these shenanigans didn’t come close to the corporate meltdowns that have shattered investor confidence. Stronger regulation would be a welcome and necessary first step to ensure that these key institutions keep to their mission: using their financial might to put more Americans into their own homes.
