Cracks in the Fannie-Freddie foundation
Washington Business Journal - by Eric Winig Staff Reporter
Remember the old ads for Sara Lee? They ended with the catchy little jingle "Nobody doesn't like Sara Lee."
Replace Sara Lee with "Fannie Mae" and who would argue? Fannie Mae is widely considered as American as motherhood and apple pie, with an unassailable mission to provide homeownership to those who otherwise couldn't afford it.
Fannie itself does much to promote this image, pouring millions into advertising and, perhaps more importantly, sponsoring countless events for U.S. congressional candidates.
For example, Fannie Mae sponsored a luncheon and roundtable discussion with U.S. Rep. Connie Morella, R-Md., Feb. 26 at the Bethesda Hyatt. The firm also regularly holds events for members of the House Subcommittee on Capital Markets, Insurance and Government-sponsored Enterprises -- the committee charged with keeping tabs on Fannie Mae (http://www.fanniemae.com).
This is clearly a company for which impressions count.
But impressions can be misleading.
A growing contingent of critics -- from scholars at the conservative American Enterprise Institute to über-liberal Ralph Nader -- contends Fannie Mae and its sister organization, Freddie Mac, have outgrown their usefulness. They charge that the government subsidies these government-sponsored enterprises (GSEs) receive -- estimated by the Congressional Budget Office at $6.5 billion a year -- often wind up not in the pockets of prospective home buyers, but in the coffers of Fannie, Freddie and their shareholders.
More ominously, some say the two housing GSEs have grown so large and taken on so much risk that they pose a systemic risk to the entire U.S. economy, akin to the savings and loan debacle of a decade ago.
Indeed, as Fannie and Freddie strive for the high-octane growth craved by Wall Street, they are increasingly turning to risky areas such as subprime and home-equity loans, thus ratcheting up their risk and increasing the odds of a costly taxpayer bailout.
Fannie and Freddie execs dismiss such talk as alarmist and inaccurate, and contend they are two of the best-managed, safest institutions in the world. Furthermore, they say the U.S. housing system, widely considered the best in the world, depends on their activities for its continued strength.
The controversy has attracted the attention of Congress, specifically Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee. Baker, who roiled markets last year when he questioned the role of the GSEs, recently introduced legislation to tighten the regulatory structure around the two mortgage giants.
Fannie and Freddie have vowed to fight the bill, setting the stage for yet another battle in a saga that ultimately involves billions of dollars, taxpayer trust and the potential for financial catastrophe.
If the bubble bursts
"These institutions will collapse."
This blunt assessment comes from Doug Noland, an analyst at David Tice & Associates, a Dallas-based money management and research firm (http://www.tice. com). Noland, who has been a vocal critic of the GSEs for years, says Fannie and Freddie (http://www.freddiemac. com) increasingly have become the buyer of last resort for financial markets and have grown so large and unwieldy that a large-scale bailout is all but unavoidable.
The logic behind his argument is that Fannie and Freddie, through their aggressive lending tactics, have created a real estate bubble of historic proportions. Consumers have leveraged themselves to the hilt against their houses on the assumption that prices will continue to go up.
However, as the harrowing tale of the Nasdaq has shown, bubbles don't last forever. When this one finally bursts, Noland says, we will have "one hell of a mess" on our hands.
He backs up his contentions with these statistics:
• Over the past three years, the GSEs have expanded their holdings of financial assets by more than $870 billion.
• Fannie Mae has a total book of business of more than $1.3 trillion, and an "allowance for losses" account of $809 million. This equals $6 held in reserve for every $10,000 worth of exposure.
• Consumers, too, are more stretched than ever. While home prices are at an all-time high, home-equity ownership is at an all-time low. Americans now own less than 55 percent of the equity in their homes, versus almost 70 percent in 1982. In other words, people are pulling money out of their homes even faster than the rapid rate at which prices have been appreciating.
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