-->Snow Seeks New Agency to Regulate Freddie, Fannie

Sept. 10 (Bloomberg) -- Treasury Secretary John Snow told Congress that Fannie Mae and Freddie Mac, the largest buyers of U.S. mortgages, need tougher oversight and suggested his department should become their regulator.

Snow delivered the Bush administration's first public recommendation to lawmakers for stronger monitoring of the government-sponsored enterprises. The crackdown was prompted by Freddie Mac's announcement it would restate earnings for the past three years by as much as $4.5 billion after accounting errors.

''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 said in testimony to the House Committee on Financial Services.

Snow asked for a new government agency to monitor and supervise the companies' finances. Lawmakers have criticized the Office of Federal Housing Enterprise Oversight for failing to anticipate Freddie Mac's situation. Some lawmakers including Democratic Senator Jon Corzine of New Jersey want the Treasury to take control from the Department of Housing and Urban Development, which oversees Ofheo.

While Snow said the administration ''would be willing to support proposals'' to house the new agency at the Treasury, he focused on what powers the new regulator should have. He also recommended the agency include oversight of the Federal Home Loan Banks, a dozen regional institutions which provide advance funds for mortgage loans.

Housing Secretary Mel Martinez said he shared Snow's aims. ''Congress and the administration have an opportunity and an obligation to strengthen the regulatory structure,'' he said. ''HUD supports transferring and strengthening such authority.''

Congress's Move

Congress has waited for Snow's views before drafting final legislation. The Treasury already helps formulate policy for Fannie Mae and Freddie Mac, and oversees the offices of the Comptroller of the Currency and Thrift Supervision.

''The current regulator does not have the tools, nor the mandate, to adequately regulate these enterprises,'' said Michael G. Oxley, the Ohio Republican who chairs the committee. Earlier today, he said there's a ''better than even chance we'll get legislation to move the regulatory function over to Treasury'' in this session of Congress.

Some congressmen disagreed that there was a need for such a change, and questioned whether the move would weaken HUD's ability to encourage affordable housing.

''I don't think we are facing any kind of a crisis'' or ''threat to the Treasury,'' Democratic Representative Barney Frank of Massachusetts said. At the same time, investors in the two companies shouldn't assume the government guarantees the companies' ability to pay debts, he said.

'World-Class' Supervision

Snow cautioned that the new law should ''should not be merely an exercise in moving existing agencies from one part of the government to another.''

''This new agency's powers should be comparable in scope and force to those of other world-class financial supervisors, fully sufficient to carry out the agency's mandate,'' Snow said.

Among his recommendations were that the new watchdog be able to review the activities of the GSEs and evaluate new activities. It should also have the right to direct the liquidation of assets or order a winding down of operations. Removing a GSE charter should require an act of Congress, he said.

While Snow said the new agency should have more ''flexible authority'' to set capital-reserve requirements, he also sought stability after new standards were introduced in the past year.

Capital Requirements

''There is some degree of flexibility in the current risk-based capital rule to deal with changes in risk profiles of the enterprises, at least with regard to the near term,'' he said. ''Having said this, I am no way proposing a moratorium on making any adjustments to risk-based capital.''

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac guarantee the credit on mortgage backed debt, as well as buy home loans and mortgage securities for their own investment portfolios.

Snow, responding to a question during the hearing, said the size of the two companies merited the change in regulation rather than ''imminent concern of danger.'' They had combined debts of around $1.5 trillion last year.

Freddie Mac is under investigation by Ofheo, the Justice Department and the Securities and Exchange Commission after accounting errors revealed this year. In June, it replaced then Chairman and Chief Executive Leland Brendsel, President David Glenn and Chief Financial Officer Vaughn Clarke after the extent of errors that were first disclosed in January became known.

Last month, Freddie Mac's replacement CEO, former chief investment officer Gregory Parseghian, was ousted after he was implicated in the accounting errors.

'Credible Regulator'

The Treasury will conduct a survey of the GSEs and their regulatory system to ensure ''they are subject to proper standards of capital, corporate governance and other levels of conduct,'' Snow testified.

Oxley said that moving regulatory oversight to Treasury would benefit the companies and investors. ''You would have a very credible regulator at Treasury,'' he said. ''That would have a solid impact on markets, on interest rates.''

One investor welcomed the plans to increase oversight.

''It is very good for the companies -- it is everything they could have asked for,'' said David Dreman, who oversees $7 billion including Freddie Mac shares for Dreman Value Management LLC in Jersey City, New Jersey. ''The fact that the regulator will be within Treasury will be good too because it gives investors more confidence Fannie and Freddie will be well watched.''

Market Reaction

Not all investors agreed, and shares of the companies fell. Fannie Mae shares declined 57 cents to $67.80 at 11:45 a.m. in New York, while Freddie Mac fell 99 cents to $54.45.

The recommendations are negative for the companies, said Andy LaPerriere, a political economist at the International Strategy and Investment Group in Washington. The ability to rule on new products and to raise capital requirements ''could crimp earnings in the future,'' he said.

The Financial Services Roundtable, a Washington-based group whose members include Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America Corp., has written to Snow to urge the transfer of regulation to his department.

Freddie Mac and Washington-based Fannie Mae, its larger rival, own or guarantee 42 percent of the $7 trillion U.S. mortgage market. While publicly owned, the companies are chartered by the government to encourage lending for home ownership. Each has an option, never used, to ask the Treasury to buy up to $2.25 billion of its debt should there be a failure in capital markets.

Public and Private

The companies make money on the difference between the cost of the debt they issue and the return on the mortgages and mortgage- backed securities they buy. They also profit from fees for placing their guarantee on mortgage securities issued through them by lenders.

The federal government gives Fannie Mae and Freddie Mac benefits such as state and local tax exemptions and conditional Treasury credit lines. One concern is that investors believe the companies' securities have an implicit government guarantee that contributes to lower borrowing costs.

Fannie Mae Chief Executive Franklin Raines said yesterday he backed stronger regulation and would support the administration's decisions. With the housing market proving to be a bright spot for the economy as it emerged from recession in late 2001, Congress is unlikely to make any changes that would hinder the way the companies do business, Raines said.

U.S. new homes sold in July at the second-fastest pace ever as mortgage rates stayed close to historic lows and refinancings have also reached record proportions. As President George W. Bush tries to gird a weak economy ahead of elections in Nov. 2004, economists said Snow won't want to disturb demand for housing or spark higher interest rates as he seeks stricter regulation.

''Housing finance is so important to our national economy that we need a strong, world-class regulatory agency to oversee the prudential operations of the GSEs and the safety and soundness of their financial activities consistent with maintaining healthy national markets for housing finance,'' Snow said.

Last Updated: September 10, 2003 11:52 EDT