Fannie Mae capital boost could slow its home-loan purchases
September 28, 2004
But changes likely won't touch consumers in short-term, analysts say
By Glenn Roberts Jr.
Regulatory demands for home mortgage giant Fannie Mae to boost capital while it's accounting problems are being worked out could slow its purchase of home loans and trim profit margins, though home buyers are not likely to notice any change in mortgage rates as a result, say analysts.
Doug Duncan, chief economist for the Mortgage Bankers Association, said, "The markets are big and liquid enough that they will not have a material effect on what consumers will see at the rate level."
Fannie Mae, a private, government-sponsored and shareholder-owned company that purchases, pools and resells home mortgages to investors, is under investigation for accounting and management problems.
David Barry takes on real estate antitrust Roger Barnes, a Fannie Mae official who expressed worries about Fannie Mae's accounting practices in discussions with federal regulators, is scheduled to testify before a congressional panel Oct. 6, Reuters reported today. Also today, a Fannie Mae executive announced that the Securities and Exchange Commission will decide whether Fannie Mae must restate its earnings.
Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, this week announced a plan to add more transparency to Fannie Mae operations. Fannie Mae, together with Freddie Mac, another powerful player in the secondary mortgage market, own or guarantee about half of the U.S. mortgage market, and Fannie Mae alone has provided an estimated $6.3 trillion in mortgage financing since 1968. Last year, Freddie Mac was fined $125 million when the company restated earnings after understating profits by about $5 billion from 2000-02.
The regulator's allowance of a long period of change at Fannie Mae, rather than a rapid period of change, should not disrupt the overall market, Duncan said. "The regulator almost certainly set it up that way so that we will have some orderly changes." And the resiliency of the housing market has been tested before – and passed the test, noted Nick Retsinas, director of the Joint Center for Housing Studies at Harvard University. Though legislators have eyed some big changes in the federal government's relationship with Fannie Mae and Freddie Mac, Retsinas said it's doubtful that Congress will act quickly on reform.
"It is clearly unlikely that something will happen this (legislative) session and this year. This is not a year where you would expect a last-minute action," he said. Ultimately, the possible impacts of the Freddie Mac and Fannie Mae troubles on the overall housing market will be decided by lawmakers, he said.
"Let's not confuse getting through a problem as eliminating the issue. What impact (current events have) on the housing market – one must wait until the sun sets, until the legislative debate is joined and completed," he said.
One analyst, Jonathan Gray of Sanford C. Bernstein & Co., said in a report to investors that if Fannie Mae becomes a liquidator of mortgages, mortgage rates could rise 25 to 40 basis points. Keith Gumbinger, a vice president at HSH Associates, a publisher of mortgage information, said that a boost in capital at Fannie Mae "theoretically could make mortgages more expensive," The Associated Press reported, though the company would more likely slim its own profits.
Other investors, too, said that Fannie Mae will likely absorb the hit to its profit margins rather than pass along higher rates to consumers. Fannie Mae's profits were nearly stagnant in the second quarter of this year, rising only slightly over profits in the second quarter of 2003.
Dain Ehring, CEO for Dorado Corp., a company that offers Web-based systems for the mortgage industry, said that without the presence of Fannie Mae and Freddie Mac, the booming housing market would be fairly flat. He cautioned against an "overzealous" political reaction to any possible problems at Fannie Mae.
"It's a hard environment to be a public company right now," he said. And while he said Fannie Mae should be accountable for any problems, he added, "This is not an Enron."
Government reform of Fannie Mae and Freddie Mac "could have some major impacts on the big picture," he said.
Legislation aimed at creating a tougher regulator for Fannie Mae and Freddie Mac stalled in Congress earlier this year. But government officials have said the Bush administration remains committed to reforming oversight of the two corporations. The administration is in favor of creating a new, stronger agency.
Copyright 2004 Inman News