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Mortgage giants are distrusted by GOP

April 14, 2005

By Marcy Gordon
Associated Press

Treasury Secretary John Snow urged Congress to restrain Fannie Mae and Freddie Mac, giving the Bush administration's blessing to efforts to create a new regulator with broad power over the huge mortgage companies.

Recent accounting scandals at the two biggest U.S. buyers of home mortgages -- expected to result in an $11-billion restatement of earnings in No. 1 Fannie Mae's case -- have heightened the administration's concern that they pose a potential risk to U.S. financial markets if they fail, Snow told the Senate Banking Committee last week.

With a legislative push under way, driven by Republicans in Congress, to strengthen the government's hand over the two companies, Snow's comments opened a partisan breach among senators and provoked a sharp reaction from some Democrats.

Because so many big financial institutions hold large amounts of the $1.8 trillion in debt issued by Fannie Mae and Freddie Mac, a crisis at or failure of either could ripple through the markets, he said. Congress created the two companies to inject money into the home-loan market, keeping mortgage rates lower. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

Snow's remarks came a day after Federal Reserve Chairman Alan Greenspan, appearing before the same Senate panel, called for Congress to limit the combined $1.5-trillion portfolios of the government-sponsored companies.

The recent troubles at Fannie Mae and Freddie Mac "reinforce concerns over the systemic risks posed" by the companies, Snow said.

The statements by Greenspan and Snow lent support to a new effort by Republican lawmakers to tighten controls on Fannie Mae and Freddie Mac, which hold or guarantee more than 45 percent of all mortgage loans in the country. Legislation recently proposed would set up a regulatory agency with the power to compel the companies to sell off any assets deemed not to be in line with their mission of making home ownership more widely available.

The remarks by the President Bush's top economic official brought a rebuke from Sen. Charles Schumer, D-N.Y., who accused the administration of trying to "virtually eliminate" Fannie Mae and Freddie Mac and using their recent accounting lapses as a pretext for doing so.

"We ought to proceed with a great deal of caution and maybe some humility," Schumer said. Other Democrats echoed his view.

Federal regulators last year accused Fannie Mae of accounting problems and earnings manipulation to meet Wall Street targets. The Securities and Exchange Commission ordered the company to restate earnings back to 2001, a correction that could reach an estimated $11 billion.

In mid-2003, three top executives at Freddie Mac were forced out and the company was found to have misstated earnings by $5 billion for 2000-2002.

For more information, go to the Office of Federal Housing Enterprise Oversight at

Copyright Associated Press

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