By 2003, Fannie Mae and Freddie Mac will have assumed the risk of almost half of all residential mortgages in the United States, says a report published by the American Enterprise Institute for Public Policy Research (AEI), putting the burden on taxpayers and creating a contradiction to their Congressionally chartered mission.

Furthermore, the study reported that if mortgage-backed securities guarantees are included in the figures, the number jumps to 91% of all conforming and conventional markets, creating a virtual nationalization of the mortgage market.

To do this, with Fannie Mae achieving a 15% year-over-year profit growth, the report is suggesting that the agencies will be taking on riskier and riskier loans as they attempt to venture into the subprime and jumbo markets.

Jeff Dircksen of the National Taxpayers Union, a lobbying group, said that Fannie Mae and Freddie Mac currently have 65% of the market for mortgage intermediary services and almost 100% of conventional MBS.

Peter J. Wallison, co-author of the study, said that the burden of this risk would lie on taxpayers, who will have to bear the risk for $1.8 trillion by the year 2003. Suggestions to ease this burden include for Freddie Mac and Fannie Mae to be fully privatized - severing all ties to the federal government - or by imposing tighter statutory and regulatory restrictions on the agencies.

"We are a private company currently," said Douglas Robinson, spokesman for Freddie Mac. "We are not an on-balance sheet liability of the U.S. federal government ... We are a private shareholder-owned company with a public mission, and have our safety and soundness regulator. We have a mission regulator, and we comply and do what we're intended to do which is create liquidity and hopefully drive down homebuyer costs."

"When Peter Wallison said, Is it possible to serve two masters?' - the private stockholders and their public mission - there is a tension there," said Beneva Schulte, spokeswoman for FM Watch, a consumer watchdog group that monitors the GSEs. "One of the things that FM Watch has been doing is talking to people on the Hill about ... how GSE debt is not about affordable housing, it's not about putting people in homes, or the dream of homeownership as Fannie and Freddie would like people to believe. It's actually about returning double-digit earnings to their investors."

Dircksen added that taxpayers should not subsidize the GSEs, as they "enrich shareholders and directors at the expense of community lenders and low-income homebuyers," he said. "An economic downturn or a change in interest rates could cause substantial numbers of high risk borrowers to default, sending Fannie and Freddie's stock prices tumbling, and leaving taxpayers holding the bag."

Not so, says Robinson. "We've never taken a taxpayer's dime," he said. "We've never had a loss. Our financial safety and soundness regulator says we are adequately capitalized."

David Jeffers, vice president of corporate relations at Fannie Mae, said that the GSE has no plans to pursue any activities outside its mission. "Fannie Mae has zero interest in ever being outside the conforming market," he said, referring to statements in the AEI study that the agency may seek to enter the jumbo market.

As for entering the subprime market, Jeffers said it is a matter of skewed perception. "The way we look at this whole subject, approximately half of the people now served by subprime lenders could today qualify for conventional mortgages," he said. "Are those people in the subprime market?"

He added that it is subprime lenders who are guiding borrowers who could qualify for conventional loans into taking subprime mortgages because they haven't been fully informed of their options. "If you're a subprime lender and you're making profits off of lending to people who are a better credit risk than how you're pricing that loan to them, what are you going to do? You're going to be mad, and you're going to say, Look at what Fannie Mae is doing. They're moving into the subprime market. They're moving beyond they're charter. They're getting into a risky area.'"

He further said that those subprime lenders are going to form studies and fund consultants and analysts who will produce reports that misrepresent the facts. Jeffers called the AEI study "junk science" and "to respond to it as if it was a substantive, meaningful report would mislead the public."

Senate Steps In

In a similar, but unrelated, announcement, Sen. Phil Gramm (R., Texas), chair of the Senate banking committee, has called for a comprehensive review of all government credit guarantees. He has suggested that government ties with the GSEs be lessened, and reaffirm that the government is not guaranteeing the debt of Fannie Mae and Freddie Mac.

Gramm called the bill introduced by U.S. Rep. Richard Baker (R., La.) last month to create a new oversight group for the GSEs a "good start" (MBSL 3/6/00). He said in order to give the GSEs more freedom, the government should "sever the umbilical cord" to the GSEs.

Fannie Mae's Jeffers said that ultimately, Gramm and Fannie Mae will work together to do what is best for both the government and the agency. "We always look forward to working with Chairman Gramm on issues that are important to him, including housing and homeownership," he said. "And we believe that the chairman shares a broad bipartisan support of how Fannie Mae carries out its congressional charter."

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