There is a scene at the end of the 1960s classic film "Planet of the Apes" when the hero, Charlton Heston, realizes that the barren landscape he sees is not on another planet after all, but the remains of Earth, rendered unrecognizable by nuclear war.
That image comes to mind as Congress debates how, and how extensively, to tighten regulatory oversight of Fannie Mae and Freddie Mac.
The need for more effective regulation of these government-sponsored enterprises is clear. Even Fannie and Freddie acknowledge that a different regulatory structure is both inevitable and desirable. But as with any legislative initiative, the devil will be in the details, and the GSEs and their supporters are rightly concerned about the details of some of the proposals Congress is considering.
One example is the proposal to draw a "bright line" limiting the GSEs to a narrowly defined group of "secondary market" activities, while barring them from "primary" activities, including many in which they are currently involved. The proprietary automated underwriting systems Fannie and Freddie have developed (opening the secondary market to smaller mortgage lenders), homebuyer counseling programs, and a host of other consumer-oriented initiatives would end up on the wrong side of this not particularly bright line, along with who knows what other innovations the GSEs would be precluded from developing in the future.
Equally problematic is a bid to cap the size of the GSEs' retained mortgage portfolios.
Fannie and Freddie say these investments contribute to the financial strength that enables them to provide affordable financing for homebuyers. Advocates of the cap, including Bush administration officials and Federal Reserve Chairman Alan Greenspan, insist that the portfolios simply increase the profits Fannie and Freddie pass on to their shareholders while providing no discernible benefits to homebuyers or to the secondary market. They also argue that the sheer size of the GSEs and their uncontrolled growth create untenable risks for the nation's financial system and for taxpayers.
But if Mr. Greenspan and others are concerned about the $1.4 trillion of mortgage assets the GSEs hold, why aren't they equally concerned, if not petrified, by the nearly $58 trillion of derivatives contracts held by commercial banks, 95% of which is held by only five institutions? If you're looking to write a doomsday financial script, Fannie and Freddie are by no means the only, or the most likely, candidates for the starring role.
Those who contend that the GSEs should be smaller - much, much smaller - insist that it can be achieved without significantly hurting the cost or availability of mortgage financing. That's a little hard to believe.
It is also hard not to wonder whether some of these proposals are designed to protect taxpayers, whose funds presumably would bail out a troubled GSE, or the financial industry competitors, which would like a larger share of the secondary mortgage market the GSEs dominate.
It seems that another bright line ought to be drawn in this debate - the line between the need to monitor Fannie and Freddie more effectively and regulate them more intelligently, and the desire of some to weaken the GSEs' influence and eventually make them disappear.
Reform advocates argue convincingly and correctly that the pursuit of profits has distracted Fannie and Freddie from their core housing mission and led to the accounting abuses that triggered the demand for stricter controls. But before we join the critics sitting on their financial high horse, it is worth taking a closer look at the Financial Accounting Standards Board rules Fannie and Freddie have violated.
To read the financial press and listen to the GSEs' critics, you'd think these rules were accepted as widely as the Ten Commandments and as easy to understand. In fact, the accounting requirements are brutally complicated, subject to varied interpretations, and much criticized by economists, who view them as more arbitrary than absolute. "Thou shalt not kill" is clear; FAS 91 and FAS 133 are not.
It is worth pointing out to critics who hate the GSEs' quasi-public status that the FASB itself is a quasi-public entity - one that was completely unregulated until a few months ago, when Congress asserted a measure of jurisdiction over it.
Even accepting for a moment the argument that the complexity of the accounting rules is no excuse for violating them, if the GSEs' critics are right - that an excessive focus on increasing profits and generating shareholder returns led Fannie and Freddie to break the rules - it is hard to see how ceding more of the secondary market to profit-driven financial institutions with no government-mandated housing mission at all will improve matters, at least for homebuyers. The benefits for the GSEs' competitors, on the other hand, are all too clear.
Let's not forget that Fannie and Freddie were created in the first place because private-sector lenders withdrew periodically from the mortgage market and left would-be homebuyers stranded on the sidelines; and because the housing finance system at the time made homeownership an option only for a relatively limited segment of the population.
Those who insist blithely that other lenders would easily fill the gap if Fannie and Freddie are scaled back have short and somewhat selective memories.
Despite their well-publicized and appropriately criticized accounting breaches, Fannie and Freddie have continued to do the job for which they were chartered: providing a stable and affordable source of funding for homebuyers.
The fact that the two secondary market giants were up and running and buying mortgages again within a week after the Sept. 11 terrorist attacks provides additional evidence, if any is needed, of their stabilizing influence in tumultuous times.
It is no coincidence that the U.S. homeownership rate is approaching 70%, with minority ownership, while still lagging, much higher than would have seemed imaginable a decade ago. Fannie and Freddie don't deserve all the credit for those gains, but it is ridiculous to deny the significant role they have played and continue to play in expanding homeownership opportunities.
No one is suggesting seriously that other financial institutions could do a better job of providing mortgage funding and ensuring secondary-market stability than the GSEs. The big complaint is that their quasi-public structure, with its implicit federal government guarantee, gives Fannie and Freddie an unfair competitive edge in the financial marketplace - an edge their competitors want to eliminate.
There is no question that Fannie and Freddie and their shareholders benefit from the existing structure, but so do American homebuyers. And therein lies the rub for policymakers: Does the GSE structure create an undesirable competitive imbalance and intolerable financial risks that a new regulatory regime must eliminate, or does this system, in fact, do precisely what it was intended to do?
If you have a home financing system that is, deservedly, the envy of the world, you don't dismantle it. You don't even tinker much with it without considering both the motivations for the tinkering and the likely consequences of any adjustments you make.
Congress should approach the proposals for GSE reform, as Sen. Charles Schumer, D-N.Y., suggested, "with a great deal of caution and some humility."
