|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
OCTOBER 18, 2004
Shine A Hard Light On Fannie Mae It's time for real oversight -- perhaps from Treasury Should we break up mortgage giant Fannie Mae (FNM )? Is it so big and out of control that it threatens the entire U.S. financial system? A lot of people in Washington think so, especially after the 211-page broadside against it by the Office of Federal Housing Enterprise Oversight (OFHEO) on Sept. 22. Unfortunately, the financial questions about Fannie Mae are entwined with ideological battles between Republicans and Democrats. The truth is hard to come by. Yet one thing is increasingly clear: At the least, Fannie Mae and its smaller sibling, Freddie Mac (FRE ), need a more sophisticated and powerful regulator. Fannie Mae has fended off the kind of oversight common to other financial institutions. And OFHEO, which belongs to the Housing & Urban Development Dept., has been a weak regulator. It did bring to light possible accounting problems at Fannie Mae (which were denied by CEO Franklin Raines in Congressional testimony on Oct. 6). But the alleged manipulation of earnings may have started as early as 1998. Where was OFHEO? And just last summer serious accounting errors at Freddie Mac were disclosed. Where was OFHEO? It's time for serious, sustained oversight. Our choice is the Treasury Dept., which already regulates national banks It's also time for definitive information on just what Fannie Mae and Freddie Mac contribute to our economy. Fannie Mae, lest we forget, was a pioneer in the '80s and '90s in securitizing debt, spreading risk, and expanding financial markets. This developed national secondary-mortgage markets for home loans and revolutionized the car, credit-card, and commercial mortgage-loan markets. But research by the Federal Reserve suggests that today Fannie and Freddie may be far less useful to homeowners than many had assumed. Their enormous financial activities may lower mortgage rates by only seven basis points. Much of the savings from its implicit government backing appears to be going to shareholders in the form of higher profits and dividends. Fannie's managers also gain through their compensation. Fannie says it's own research shows big benefits for homeowners. We need to know if this is true. We also must understand how much risk Fannie Mae poses to the financial system. Federal Reserve Chairman Alan Greenspan, a critic of Fannie Mae, told Congress in February that he is worried. Fannie Mae is the second-largest issuer of debt in the U.S., behind only the federal government. The immense size and scale of Fannie and Freddie may be making the financial system more vulnerable to unforeseen shocks. Greenspan wants to prevent that by slowing Fannie and Freddie's expansion. To do it, he would raise their capital standard. It's a prudent idea. Fannie Mae has played a critical role in expanding homeownership in America, especially among first-time, minority, and low-income buyers. But there are serious questions that must be addressed about its governance, its benefit to society, and its risk to the financial system. This is not simply politics. It is an economic issue. 
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
