The time has come for Congress to stop playing political football with the Office of Federal Housing Enterprise Oversight, the regulatory agency that’s supposed to keep a close eye on Fannie Mae and Freddie Mac.
OFHEO and the two scandal-plagued mortgage companies have been the subject of multiple Congressional hearings for more than two years, yet Congress has yet to increase the agency’s authority or resources. This agency needs to be empowered to achieve its mission now, not after the November elections and not sometime next year.
It’s no secret that OFHEO wasn’t on guard against dirty tricks in the accounting functions at the two government-created mortgage giants, which were forced to restate earnings by a combined $16 billion and pay more than $500 million in fines.
Congressional testimony has suggested that failure was due to inadequate authority and resources at OFHEO relative to the sheer size of the regulatory task. The problem is known; why hasn’t the remedy been effected?
The delay isn’t without consequences: As long as the OFHEO legislation is stalled, Fannie Mae and Freddie Mac continue to operate with diminished oversight and continue to represent a “substantial systemic risk” to the U.S. banking sector, according to OFHEO Director James Lockhart.
Fannie Mae and Freddie Mac have said their accounting control problems are being resolved. That’s fine, but it will take years to accomplish and it still won’t be enough to protect the housing markets and banking sector. Without a strong regulatory agency on the job, the potential for history to repeat itself remains high.
“Legislation is needed to make sure that these two companies do not falter again,” Lockhart told banking and finance lawyers in early August.
What’s more, even healthy housing markets could “soften seriously from an unexpected disruption in the ability of Fannie Mae and Freddie Mac to function effectively in secondary mortgage markets,” OFHEO Chief Economist Patrick Lawler told Congress this month.
OFHEO supports legislation “that will create a new regulator with adequate funding, bank-like regulatory and enforcement authorities,” Lawler testified.
The U.S. House of Representatives has passed a bill that would create a new stronger regulator to replace OFHEO, but the companion legislation in the Senate is hung up on whether the new regulator will have the authority to cap the size of Fannie Mae’s and Freddie Mac’s mortgage loan portfolios, which are worth $1.4 trillion. (Yes, that’s $1,400,000,000,000.)
Freddie Mac said last month that it would cap its portfolio at $710 billion, while Fannie Mae in June offered to cap its portfolio at $727 billion. Those caps are voluntary, however, and can be removed at the whim of the two corporations, a fact that makes the caps meaningless. Indeed, Freddie Mac CEO Richard Syron already has told investors that the corporation will lift its self-imposed restriction early next year.
Unfettered portfolios might generate bigger profits for shareholders, but not without greater risk to the corporation.
Critics, including Freddie Mac, have argued that restrictions on the portfolios would transfer the risk to lenders and squeeze liquidity in the secondary mortgage market.
The disagreement strongly suggests OFHEO, or its successor, should have the power to decide whether to restrict the growth of Fannie Mae’s and Freddie Mac’s portfolios. Congress shouldn’t micromanage this issue, but instead should delegate that authority to a strong regulator along with clear objectives that are stated, yet not carved in stone.
That said, if unlimited portfolio growth — for the time being — is the only way to push forward the regulatory legislation, so be it. An even worse scenario would be for this one issue to hold up the whole works.
What’s also egregious is the appearance that Congress may be engaged in a deliberate delay to keep OFHEO in play until after the November election. As long as OFHEO is on the table, Fannie Mae and Freddie Mac have an incentive to donate more money to the campaign coffers of congressional representatives in an effort to sway the outcome after the votes are in.
Both corporations are significant political donors that have major lobbying organizations as well. Not all of their activities have been above board: The Federal Election Commission fined Freddie Mac a record $3.8 million this year for “illegal involvement in fundraisers for members of Congress, including members who regulate the company,” according to OpenSecrets.org.
The chief power standing between Congress and the corporations is OFHEO; that’s why the regulatory agency should be empowered to do its job now.
Marcie Geffner is a real estate reporter in Los Angeles.
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