Tougher Regulator Urged for Mortgage Funders

The White House on Monday called for a new, stronger regulator for government-sponsored housing enterprises, saying a problem at one of the giant mortgage funders could spread throughout the financial system.

The Bush administration, in an analysis of the U.S. economy that accompanied its budget proposal, questioned the value of Fannie Mae, Freddie Mac and the Federal Home Loan Bank system, given the risks their operations pose.

A new regulator should be created that consolidates Fannie Mae’s and Freddie Mac’s regulator with that of the Federal Home Loan Bank system, the Bush administration said.

It should have expanded enforcement authority, the ability to place the businesses in receivership and “unambiguous authority” to set minimum capital requirements, according to the budget document.

The Housing and Urban Development Department also should have the authority to penalize Fannie Mae and Freddie Mac for failing to meet goals for affordable housing set out last year, the White House said.

Fannie Mae faces an earnings restatement of potentially $9 billion after accounting errors were uncovered last year. That led to the ousting of the company’s chief executive and chief financial officer and followed accounting problems at Freddie Mac in 2003.

Fannie Mae and Freddie Mac buy mortgages from originators and package them as mortgage-backed securities. They also keep mortgages in their portfolios as whole loans or securities. In 2003, they accounted for 47.2% of total residential mortgage debt outstanding, according to their regulator, the Office of Federal Housing Enterprise Oversight.

The White House said that while Fannie Mae and Freddie Mac generate “some benefits” in supporting the mortgage market and lowering mortgage rates, they face interest-rate risk that when coupled with poor management can lead to operational failure.

The management of interest-rate risk and operations risk is a significant challenge for them, according to the White House, because of their size, regulatory structure and lack of “full market discipline.”

Investors cannot discipline the companies because they do not have enough information about their risks and financial condition, the Bush administration said.

The White House comments echoed concerns voiced on Capitol Hill. Committees in the House and Senate this week will hold hearings on Fannie Mae and Freddie Mac, with expected testimony from officials of the Securities and Exchange Commission and Department of Housing and Urban Development.