A Senate proposal that would undermine the government’s implicit support of two mortgage financing giants was denounced Thursday by a top housing industry executive, who warned against “tinkering with what remains the only strong segment of the economy.”
Jerry Howard, chief executive of the National Association of Home Builders, said the latest plan to rein in financing giants Freddie Mac and Fannie Mae was a “backdoor” effort to attack the special status that allows them to raise money at extremely favorable rates.
“To a sophisticated investor … this sends the exact wrong message,” Howard said in a conference call with reporters. “Tinkering with what remains the only strong segment of the economy at this time is a dangerous course to be pursuing right now, and we would suggest that it doesn’t make much sense.”
Howard was responding to Senate Banking Committee Chairman Richard Shelby’s R-Ala., backing for plans that would give a new regulator the authority to put Fannie Mae or Freddie Mac into “receivership” if they were to collapse. That would allow the regulator to wind down their operations.
Under the current federal charter governing the two government-sponsored enterprises only Congress has the authority to shut them down.
“You can't have it both ways,” Shelby, told reporters outside the Senate chamber, according to Reuters. “We're committed to housing, most of us on the Banking Committee are, in a big way, because it's very important, but we're also very interested in safety and soundness, and you've got to have a balance there.”
Howard said the NAHB, a powerful lobbying group, would oppose Shelby’s legislation if it includes the provision on receivership.
The dispute over seemingly obscure legislative language was the latest in a series of increasingly visible flare-ups over the future of the two institutions over the past month.
Last month Federal Reserve Chairman Alan Greenspan warned that because of their sheer size and complexity the GSEs pose “very serious” risks to the U.S. financial system. And Treasury Secretary John Snow warned that the White House would not support legislation that offered only “inadequate” reform of the system.
While the GSEs have played a major role in the record housing boom that has helped keep the economy growing in recent years, the two companies have been squirming in the spotlight since revelations of massive accounting problems at Freddie Mac last year.
Freddie Mac’s chief executive was forced out, the company was ordered to pay a $125 million fine and it has restated its financial results for 2000, 2001 and 2002. In a recent filing the company said it hopes to provide 2003 results by July 30 — six months behind schedule.
But the housing industry, which has enjoyed three straight years of record sales, is loath to make any changes that might adversely affect mortgage rates, which have dropped in recent weeks to approach the 45-year lows they touched last summer.
The implicit government backing allows Fannie Mae and Freddie Mac to sell debt at only slightly above what investors pay for Treasury securities, lowering their borrowing costs by nearly a half-percentage point, according to one congressional study.
But a recent Fed study, cited by Greenspan, contends that most of the benefit goes to shareholders of the two companies rather than ordinary borrowers. The liquidity provided by Fannie and Freddie cuts the average mortgage rate by only 0.07 percentage point, according to the Fed study.
David Seiders, chief economist for the home builders, disputes that assertion and says the effect on mortgage rates is “an incredibly uncertain point.”
He said Shelby’s proposal is a “rather clever” attack on the GSE status of the two companies. “Because if you change the market perception of what they are and their relation to the government you really could affect the mortgage rate.”
Jonathan Ukeiley, a credit analyst at Standard & Poor’s, said the credit agency would have to review its current ratings of Fannie Mae and Freddie Mac debt if the legislation moves forward, which is far from certain.
“Any legislation that puts the government in a position in which it is distancing itself away from Freddie Mac and Fannie Mae, we would have to take that into account and then potentially reassess our understanding of the relationship between the government and the GSEs,” he said.
Bert Ely, a Washington consultant who specializes in banking issues, said the receivership issue is only one of many thorny questions that make passage of reform bill questionable this year.
“On top of all the politics there are some difficult substantive issues,” he said. “I’m not convinced Congress is ready to pass something unless there is a fairly high belief that it would be credible.”
Ultimately he said the solution is more radical: to “privatize” the two GSEs, eliminating their special advantages and allowing banks and thrifts to compete in the giant secondary mortgage business. Ely’s idea has been championed by the conservative American Enterprise Institute, but Ely conceded it is still only in “the think tank stage.”
“At this point in time there certainly are very few people focused on it,” he said.