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Bush budget proposes new Fannie, Freddie regulator

Posted on: Monday, 6 February 2006, 10:35 CST

WASHINGTON (Reuters) - The Bush administration on Monday said Congress should create a new regulator for Fannie Mae and Freddie Mac and direct it to cut the $1.4 trillion investment portfolios held by the mortgage finance giants.

In an analysis accompanying Bush's budget proposal, the White House reiterated its view that the portfolios of loans and securities held by the government-sponsored enterprises pose a risk to the broader financial system.

The administration said legislation to overhaul supervision of Fannie, Freddie and the Federal Home Loan Bank System should give a new regulator authority to assess not only safety and soundness concerns but also the "systemic risk" posed by the enterprises and their activities.

Congress, the budget analysis said, could limit the risk those portfolios pose to the U.S. financial system by requiring the companies to dispose of certain assets over time, leaving only those that provide a specific public benefit, such as a pipeline for mortgage securitization and affordable housing mortgages that are not suitable for pooling.

"Mitigating systemic risk requires taking action before a crisis occurs," the budget analysis said. "A world-class regulator for the GSEs must be equipped with the power to limit the systemic risk posed by a GSE before any safety and soundness event at a particular GSE occurs."

Congress this year is again weighing measures to stiffen oversight of the government-sponsored enterprises following accounting scandals at Fannie and Freddie. Problems at Fannie are still under investigation, but issues identified so far are expected to result in a profit restatement of as much as $11 billion.

The House of Representatives already passed a bill to create a new regulator for the companies, but the White House opposed that legislation because it did not specifically direct the supervisor to cut Fannie's and Freddie's portfolios.

The portfolios, according to the Bush administration, pose a risk to the financial system by aggregating interest rate and prepayment risk and requiring large amounts of hedging.

Fannie and Freddie argue that the portfolios help them fulfill their congressionally mandated mission to support the mortgage market, especially during times of crisis when the portfolios can be used to inject funds into the market.

But on Monday, the White House rejected that argument, saying the companies do not need to hold investment portfolios beforehand in order to provide liquidity during a crisis.

Fannie and Freddie are shareholder-owned but government-sponsored enterprises charged by Congress with supporting the housing finance market.

To do this, they buy mortgages from underwriting, giving lenders money to make more loans. They then pool those loans into securities for sale to investors. They also hold some loans and securities in their portfolios.

The companies also sell debt and use the proceeds to buy mortgage-backed securities.

The White House on Monday noted those debt sales could boost the cost of borrowing for the federal government by putting agency securities up to compete with U.S. Treasuries for investors' attention.

Source: REUTERS

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