Is Fannie’s house in order?

IT SEEMS THAT MORTGAGE powerhouse Fannie Mae -- which in May paid a $400-million fine to settle charges of shoddy accounting with its chief regulator, the Office of Federal Housing Enterprise Oversight, and with the Securities and Exchange Commission -- may finally be winding its way back into the good graces of Wall Street and the federal government. The company is on track to restate past earnings (to the tune of $11 billion) by the beginning of the year. On Thursday, it announced that the Justice Department was dropping a criminal investigation of its practices.

Pity that the federal government has done little to make sure that Fannie Mae doesn’t have a relapse.

Fannie Mae, along with its sister company, Freddie Mac, were chartered by Congress to keep mortgage markets liquid by buying loans from banks and reselling the debt to investors. Even though it was turned over to private investors in 1968, Fannie Mae still enjoyed tax breaks, loose capital restrictions and low borrowing costs that were unavailable to other publicly traded companies. Its special status as a politically powerful “government-sponsored enterprise” meant that it also got preferential treatment from investors, who assumed that taxpayers would bail it out if it ever got into serious trouble.

Fannie Mae and Freddie Mac also face lighter regulation than do other financial institutions. Their regulator, the housing oversight agency, doesn’t oversee all aspects of Fannie Mae’s business; it doesn’t have the authority to litigate against bad actors in the company; and it can’t limit risky (but profitable) investments that could endanger Fannie Mae’s ability to maintain liquidity in the mortgage market.

The Bush administration is backing efforts in Congress to grant Fannie Mae’s regulator the same powers that most bank regulators have, but the effort is inexcusably stalled in the Senate. Powerful real estate lobbyists and Democrats who think Republicans are ganging up on the “affordable housing” champion apparently feel that the health of the housing industry is somehow tied to Fannie Mae’s ability to get away with financial shenanigans.