WASHINGTON — Fannie Mae’s chairman and chief executive does not sound like he plans to concede to White House demands about reforming the regulation of the housing government-sponsored enterprises.
On Wednesday, in his first public comments since the Office of Federal Housing Enterprise Oversight issued its 185-page report on Freddie Mac’s accounting misdeeds, Franklin D. Raines sought to reassure investors that Fannie does not face the same problems. He also cautioned against efforts to sever the GSEs’ Treasury line of credit and rebutted the administration’s call for a new supervisor with control over the companies’ minimum capital.
Many observers had said OFHEO might find similar problems in a recently launched investigation of Fannie. But Mr. Raines said the two companies were not comparable in that way, and he pointed out that Fannie has already registered with the Securities and Exchange Commission. (Freddie is not expected to register until 2005.) “We work very hard at Fannie Mae to be a best-in-class company with regard to corporate governance and disclosures, and Fannie Mae and Freddie Mac are apparently quite different companies in that regard,” Mr. Raines said at the speech at George Washington University.
SEC registration is “the best assurance that people have that Fannie Mae” does not face the same issues Freddie does, he said. “That is the best evidence that anyone can have. Anyone who has seen our 10-K knows that we disclose a lot. The fact that we go through the SEC process is a third-party validation to be a means by which we have been able to manage our company.”
Freddie’s GSE status did not cause its problems, Mr. Raines said.
“We are a very different company in many, many respects, and I think that can be proven out. The fact that we are in the same business” does not mean “we go about that business in the same way,” he said. “As far as I can tell … the issues at Freddie Mac had nothing to do with the fact that they are a GSE. The same issues could come up if they weren’t.”
Mr. Raines also responded to recent comments by Treasury officials about the possibility of eliminating Fannie and Freddie’s $2.25 billion line of credit. Though he acknowledged that the line is “largely symbolic,” he said it is important to the market and critical in helping Fannie expand homeownership.
“The Treasury authority signifies that Fannie Mae is a part of national housing policy and that the government has a commitment to support homeownership as a matter of policy,” he said. “The market values that commitment, and our involvement in that market helps us carry out our mission.”
Many of the benefits of GSE status, including the credit line and exemption from local income taxes, are partly offset by congressional mandates, including affordable housing goals, Mr. Raines said. Removing a benefit should mean removing a restriction. “When someone suggests that a benefit be scaled back or eliminated, it is crucial that they also determine which restriction will also be scaled back or eliminated.”
Additionally, Mr. Raines reiterated his objections to the creation of a supervisor with power over Fannie’s minimum capital. A new regulator should have the authority to raise or lower risk-based capital, but that would be enough power, he said.
The administration initially did not take a position on whether a new regulator needed power over minimum capital but has since made it one of the minimum standards for reform. At a speech last month, N. Gregory Mankiw, the chairman of the Council of Economic Advisors, emphasized that “the new GSE regulator should have broad authority to set both risk-based and minimum capital” standards.
“Minimum capital standards are important because they insure against unanticipated and unquantifiable risks,” Mr. Mankiw said.
Mr. Mankiw gave a speech on manufacturing at an Exchequer Club luncheon Wednesday, but he touched briefly on GSE reform during a question-and-answer period. He said it would not “be a threat to the housing system at all.”
But Mr. Raines said, “The call for flexibility to change minimum capital strike our ears as a call for more minimum capital, even if it is not more risky.”
He emphasized the difference between Fannie’s held capital and that of banks.
“Your typical big bank has 12 times the capital they have of credit losses,” Mr. Raines said. “We have 365 times … so it’s not clear to me how our minimum capital would even get on the table as an issue.”
Fannie has no plans to separate the chairman and CEO jobs, Mr. Raines said, as OFHEO has ordered Freddie to do. Many have called separating the jobs a best practice for corporate governance.
He also sought to preemptively refute an upcoming Federal Reserve Board study on the GSEs’ benefit to the housing market, which is expected to say that they do not lower consumer mortgage interest rates by much.
Rates for jumbo loans (which the GSEs cannot buy) on average are 25 to 50 basis points higher than those for conforming loans (which they can), he said. “Does a 25- to 50-basis-point difference really matter? It works out to as much as $18,800 to $37,800 over the life of the loan. Certainly most families would rather sink that kind of money into the children’s college fund than spend it on financing costs.”
