In spite of calls for restraint on the part of the OFHEO, it looks like Fannie Mae and Freddie Mac will be called on to do more- and possibly do it with less capital:
Amid the worst housing crisis in a generation, pressures are mounting for an expanded role by the two mortgage finance companies, even as lawmakers also call for a tightening of the reins on them in the wake of multibillion-dollar accounting scandals.
At a hearing of the Senate Banking Committee, its chairman, Sen. Christopher Dodd, D-Conn., said the two companies need to do more to help homeowners with high-priced loans refinance into more affordable mortgages. Lenders also stand to benefit from the fees generated by this increased activity.
The economic stimulus package passed by the Senate Thursday and speeding toward President Bush’s desk includes a provision raising for one year the cap on mortgages that Fannie and Freddie may buy in high-cost areas from $417,000 up to $729,750, a move intended to stimulate new loans and refinancing activity in markets such as California and the Northeast.
The proposal raised red flags among some Republican senators, who said it would drain large amounts of capital from Fannie and Freddie that could otherwise go into lower-priced mortgages. Raising the cap, they warned, to include so-called ‘jumbo’ mortgages just raises the potential for bigger losses.
And since half the affected mortgages are in California, the risk would be ‘very concentrated,’ said James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight — the agency that oversees Fannie and Freddie.
Lockhart told the panel that the loan cap should not be raised without also providing stricter government regulation of the companies.
But Dodd insisted, ‘We’re in a major economic crisis. … We’ve got to act.’
In return for allowing Fannie and Freddie to buy the higher-priced mortgages, Sen. Charles Schumer, D-N.Y., said the companies should agree to refinance more troubled lower-income borrowers.
And Dodd and Schumer floated a new idea. The 30 percent cushion of extra capital that Fannie and Freddie are required to hold by the regulatory agency — representing nearly $20 billion for the two — could be reduced and some of the freed-up funds put into buying mortgages of struggling borrowers.
Lockhart said it’s too soon to deflate that cushion. ‘We need to be very careful,’ he said.
Sadly Dodd and Schumer don’t seem to understand the doctrine of "First, do no harm." They would do well to head the warning given by Lockhart:
The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times. They are fulfilling their missions of providing liquidity, stability, and affordability to the mortgage markets. In doing so, they have been reducing risks in the market, but concentrating mortgage risks on themselves. Fannie Mae and Freddie Mac support their missions by guaranteeing and issuing mortgage backed securities (MBS), which represents approximately 70 percent of their business in 2007. Their other business activity is buying mortgages and MBS for their retained mortgage portfolios.
The risks are beginning to take their toll. Public disclosures indicate that Freddie Mac will report annual losses for the first time in its history and Fannie Mae for the first time in 22 years. Their missions, as well as Congressional and many other pressures, are demanding that they do more and take on more risks in areas new to them – subprime and jumbo mortgages.As the safety and soundness regulator of Fannie Mae and Freddie Mac, I have to tell you that expansion of their activities would be imprudent unless the regulator has significantly more powers and more flexibility to use those powers. Given the tremendous stresses on the mortgage markets, the American people cannot afford to have Fannie Mae, Freddie Mac, or the 12 FHLBanks incapable of serving their mission.
It seems likely that even with the regulator having "more powers and flexibility", to have the GSEs take on more more risks at this point is imprudent.
