Last week, Federal Reserve Chairman Alan Greenspan delivered a double whammy to Fannie Mae and Freddie Mac.

Speaking before a group of credit union executives on Monday, he questioned whether fixed-rate mortgages - a staple Freddie and Fannie product - are a good choice for consumers. During his testimony before the Senate Banking Committee later in the week, he slammed the mortgage lenders again when he hit on sensitive topics such as potential future systemic risk involving the two agencies and GSE privatization. He also suggested curbing Fannie's and Freddie's ability to issue debt and purchase assets.

The heads of both agencies retaliated during testimony before the same committee by opposing any restrictions on GSE growth. Such restrictions would reduce access to 30-year, fixed-rate mortgages, they said, making them more expensive for consumers.

The key question asked by analysts was whether Greenspan was successful in shifting the GSE debate from regulatory reform to whether Fannie and Freddie still serve their intended purpose. Further complicating the issue is the Bush administration's proposal to Congress to move GSE oversight from the Office of Federal Housing Enterprise Oversight (OFHEO) to the Department of the Treasury.

According to Art Frank, head of mortgage research at Nomura Securities International, Greenspan's testimony on the GSEs caused MBS spreads to widen for just a few brief minutes after his remarks. After this, spreads bounced back with some investors purchasing MBS shortly after the widening.

Frank said that the Federal Reserve chairman's comments are in keeping with his prior stance on the issue. "Greenspan has been a GSE critic for many years," said Frank. He added that the Fed chair is a free-market economist and disagrees on principle with the premise on which the Fannie and Freddie charters are based - that of two private companies having government ties. The only thing that was new was the specificity by which Greenspan called for the slowing of the GSEs' portfolio growth.

However, Frank does not believe that Greenspan's comments had any material effect on the way Congress views the current debate about GSE regulatory reform. "I think that Greenspan has a lot of respect and prestige for his managing of monetary policy but I don't think that he is seen by members of Congress as the one to look to for advice on GSE regulatory reform," said Frank. "I don't think Greenspan has changed the congressional politics of the issue."

There is still a great deal of uncertainty as to whether Congress will act on the Bush proposal on GSE financial oversight, Frank said. However, a compromise bridging the differences between the administration's regulatory reform proposal and what the GSEs and their allies want is possible. In other words, the passing of a law on regulatory reform will ultimately depend on whether the Bush administration and the GSE and their supporters are willing to meet halfway on this issue.

"I think there are many agency dealers and investors who would like to see the issue resolved if only to eliminate or at least limit headline risk currently associated with Fannie and Freddie debt, " said Frank.

Greenspan strikes hard

Bert Ely, the president of Ely & Associates, maintained that Greenspan's comments would dramatically shift the focus of the debate from how to regulate the GSEs, to the question of whether Fannie's and Freddie's continued growth posed an increasing risk to systemic stability and the taxpayers.

Ely said that Greenspan is signaling to Congress that they are focusing on the wrong things, as if saying, "You are looking at procedural and regulatory issues when you need instead to focus on the substance of what these companies do and whether or not they are even needed anymore." Ely said that it would be difficult for Congress to ignore what Greenspan has said. The Fed chairman did not raise the issue just to drop it in the end, he said.

In terms of Congress acting on the Bush proposal for regulatory reform, Ely believes that even without Greenspan's testimony, the law would not have been passed by the end of 2004. This is partly because Freddie and Fannie do not want legislation passed despite their claims to the contrary, Ely said. However, if a headline event occurs between now and July, especially concerning Fannie, this legislation has a great possibility of being passed by the end of the year based on recent experience. Ely noted that it took the Freddie accounting scandal of last year for people to push for the GSE legislation currently pending in Congress.

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