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Freddie, Fannie barely cut mortgage costs

Fannie Mae and Freddie Mac enjoy huge subsidies from the federal government, but those benefits translate into only a tiny drop in the mortgage rates paid by home buyers, a Federal Reserve economist concluded Monday.
/ Source: The Associated Press

Fannie Mae and Freddie Mac enjoy huge subsidies from the federal government, but those benefits translate into only a tiny drop in the mortgage rates paid by home buyers, a Federal Reserve economist concluded Monday.

The new study seemed certain to intensify the debate over clamping greater controls on the two mortgage giants.

The Fed study calculated that Fannie and Freddie, the two government-sponsored corporations which are the biggest players in the nation's multitrillion-dollar mortgage market, receive a government subsidy of between $119 billion and $164 billion.

Despite these huge benefits, the Fed study estimated that Fannie and Freddie lowered the cost of home mortgages by only about 0.07 percentage point, or seven basis points. As an example, a seven-basis-point increase would take the current nationwide average for 30-year mortgages from 5.82 percent to 5.89 percent.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home mortgage market by buying home loans from banks and bundling them into securities for sale on Wall Street. That provides banks with more money with which to make home loans.

The two corporations, whose stock is publicly traded, have enjoyed explosive growth in recent years and now rank among the nation's largest financial institutions. Together, the two carry $1.6 trillion in assets on their books and have outstanding debt of $1.5 trillion, a figure that has raised concerns in Congress about what might happen if either company encountered serious financial trouble.

The success of the two corporations, both headquartered in the Washington area, has spurred complaints from private companies of unfair competition and generated moves in Congress to impose tougher regulations.

Congress currently is considering whether the regulation of both Fannie and Freddie and the 12 regional Federal Home Loan Banks should be consolidated in a single watchdog agency located in the Treasury Department.

Pressure for stricter regulatory oversight has increased with revelations of an accounting scandal at Freddie Mac, which is facing a criminal investigation by the Justice Department and a civil inquiry by the Securities and Exchange Commission after it revealed it had understated earnings by $5 billion for the 2000-2002 period.

The new study, done by Federal Reserve economist Wayne Passmore, found that the special advantages provided Fannie and Freddie by their standing as government-sponsored enterprises give them a significant funding advantage _ of 0.4 percentage point, or 40 basis points _ over private-sector institutions.

This funding advantage comes from the "perception" that if Fannie and Freddie ever faced financial market difficulties, the federal government would step in and bail them out, the study found.

It put the total subsidy advantage at between $119 billion and $164 billion with the shareholders' portion of that amount estimated at between $50 billion and $97 billion or about 52 percent of the total subsidy at a midpoint level of $72 billion.

"Most purchasers of the (Fannie Mae and Freddie Mac) debt securities believe that this debt is implicitly backed by the U.S. government despite the lack of a legal basis for such a belief," the study found.

The study said there was little evidence to support a claim that Fannie and Freddie have done much to increase homeownership in the country because their impact on mortgage rates has been so slight.

Supporters of the two corporations, however, disagreed, arguing much bigger favorable impacts.

Michael Cosgrove, a spokesman for Freddie Mac, called the Fed staff study "an interesting but fundamentally flawed academic exercise." He said that other researchers have found that Freddie Mac and Fannie Mae provide consumers with $4 in benefits for every $1 in implied benefits that they receive as government sponsored enterprises.

Chuck Greener, a Fannie Mae senior vice president, said the findings in the Fed study were "highly theoretical and bear no resemblance to the reality experienced in the housing industry and capital markets every day."

The Bush administration has endorsed moving regulation of Fannie and Freddie from the little known Office of Federal Housing Enterprise Oversight to a more high-profile setting in the Treasury Department.

But it is unclear whether such a change will garner much support in Congress in the upcoming election year, given that both Fannie and Freddie enjoy considerable influence on Capitol Hill and for years have resisted congressional attempts at tighter regulation.