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Fed Warns of Fannie, Freddie Risks
By Mark Felsenthal
CHICAGO (Reuters) - Federal Reserve (news - web sites) economists are renewing questions about risks and benefits associated with mortgage finance giants Fannie Mae and Freddie Mac, saying the companies' shareholders get more out the companies' government backing than homeowners do.
Fed Board of Governors economist Wayne Passmore said on Friday Fannie Mae's and Freddie Mac's congressional charters -- which grant them several advantages, including the ability to tap the Treasury for $2.25 billion each in an emergency -- is worth billions to the companies because of the erroneous perception of government backing it fosters among investors.
"This ambiguous government relationship creates an implicit government subsidy" to the government-sponsored-enterprises, Passmore said in a study prepared for the Fed.
The companies have disputed earlier editions of the paper, which Passmore defended at a banking conference sponsored by the Chicago Federal Reserve. Fannie Mae and Freddie Mac have said Passmore's findings underestimate the companies' impact on reducing the costs of buying a home, both directly through efficiencies in mortgage lending and indirectly in providing stability to the financial system.
Fannie Mae on Thursday released a paper by Princeton economist and former Fed Vice Chairman Alan Blinder saying Passmore misjudged the savings to homebuyers due to the gap in interest rates between mortgages the government-sponsored-enterprises buy and ones they do not.
"The analysis is not sufficiently robust to support arguments for major changes in the federal government's relationship with the GSEs," Blinder said.
FED VOCAL WITH CONCERNS
But Passmore's study, and one by Atlanta Fed economist Scott Frame saying the enterprises may engage in riskier behavior as they seek to sustain their growth rates, add to a chorus of central bank warnings about Fannie Mae and Freddie Mac.
Fed Chairman Alan Greenspan (news - web sites) urged Congress earlier this year to control their size, particularly their mortgage portfolios. More recently, St. Louis Fed President William Poole and Fed Governor Susan Bies expressed concerns about potential risks associated with the companies.
Poole called on Thursday for repeal of Fannie Mae's and Freddie Mac's Treasury lines of credit to send a signal to investors that the government does not guarantee GSE debt.
The critical comments from Fed officials come after the companies rattled markets last year with an accounting scandal at Freddie Mac and a $1.2 billion bookkeeping error at Fannie Mae.
On Thursday, Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, challenged the company's accounting for some investments that had lost value and asked it to resubmit some of financial data. The regulator has said the changes may lead the company to have to restate earnings.
Congress has been unable to agree on a regulatory overhaul because of disagreements over how far the government should distance itself from the mortgage finance companies, which have broad political support.
SNOW: NO IMMEDIATE RISK
Passmore, in a new version of the study on the benefits, estimated benefits given the companies to help them boost home ownership are worth between $130 billion and $183 billion, of which approximately 54 percent goes to stake holders in the enterprises rather than to lowering home ownership costs.
A congressional budget office official this year estimated the subsidy at around $23 billion.
Passmore said the companies reduce mortgage interest rates for homebuyers by a modest 0.07 percentage point.
Treasury Secretary John Snow told the same conference that while no there is no immediate risk to the financial system from the companies, they should be supervised more rigorously. He said the administration would continue to press for legislation bolstering oversight.
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