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Saving the American dream, averting a nightmare

U.S. House Financial Services Committee passes legislation to stiffen oversight of mortgage giants Fannie Mae, Freddie Mac


June 3, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Legislation to stiffen oversight of mortgage giants Fannie Mae and Freddie Mac cleared its first major hurdle last week as the U.S. Congress House Financial Services Committee passed the measure with ease. By a vote of 65 to 5, the House panel approved the bill to create a new regulator with stronger powers over their business activities. The legislation now moves to the House floor for a full vote.

Fannie Mae, as well as its smaller cousin Freddie Mac, is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across the U.S. It doesn’t lend money directly to home buyers. Instead, it works with lenders to make sure they don’t run out of mortgage funds, so more people can achieve their goal of homeownership.

Commercial banks, mortgage banks, and credit unions in Puerto Rico and the U.S. mainland originate mortgage loans that are pooled (bundled) and sold to the secondary market (Fannie Mae, Freddie Mac, and Ginnie Mae) as mortgage-backed securities (MBS) through a securitization process. Securitization is the process of transforming nonmarketable loans into marketable securities.

The most popular and active investors in the local and stateside mortgage markets are Fannie Mae, Freddie Mac, and Ginnie Mae. The size of Fannie and Freddie’s investment holdings has become the central focus of debate among U.S. mainland lawmakers working to create a new independent agency to replace Fannie and Freddie’s current regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). OFHEO last year uncovered accounting violations at Fannie that led to the ouster of top executives and the possible restatement of as much as $12 billion in previously reported earnings.

"This represented a serious concern for the U.S. banking industry, of which Puerto Rico banks are a part, since Fannie and Freddie provide liquidity to the market," R-G Financial Corp. President Ramón Prats told CARIBBEAN BUSINESS. "By being a national problem, it is a lighter problem for us, but still important. Local banks and mortgage lending institutions have created other mechanisms, as we sell [portfolios] to other banks."

The House bill sponsored by Republican Reps. Michael Oxley of Ohio and Richard Baker of Louisiana creates a new regulator with the authority to set capital standards, approve new business activities and place a failed government-sponsored enterprise in receivership.

Yet, it doesn’t direct the regulator to cut the companies’ holdings of mortgages and related securities, currently standing at $1.5 trillion, or nearly one-fifth of the outstanding U.S. residential mortgage debt. Federal Reserve Chairman Alan Greenspan warned that the size of their portfolios pose a risk to the broader U.S. financial system by aggregating so much interest and prepayment risk within two companies.

"Had Congress not acted, no one would be able buy the mortgage loans; and people would start losing credibility in these two entities," stated Richard Prann, senior vice president of investment at BBVA Securities. "If private banks step in to fill the gap, there would definitely be a higher cost involved in terms of interest rates, and it will be more expensive for the government and for taxpayers. I am confident this legislation will put Fannie Mae and Freddie Mac’s problems to rest."

This Caribbean Business article appears courtesy of Casiano Communications.
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