Fannie, Freddie under fire

2005 has been a tough year already for mortgage funding giants Fannie Mae and Freddie Mac.

In his annual budget message to Congress, President Bush sought a new regulator for the government-sponsored enterprises (GSEs), as well as the Federal Home Loan Bank system. Senate leaders have been mulling GSE regulator reform since last year, but revelations in December that Fannie Mae may have to restate as much as $9 billion in earnings makes the time uniquely right.

Senate Banking Committee Chairman Richard Shelby, R-AL, has championed GSE reform since ascending to the chair, but the GSEs' formidable lobbying pushback put reform on the back burner in 2004. With Fannie's potential restatement, the White House and other Senators, notably Chuck Hagel, R-NE, John Sununu, R-NH and Elizabeth Dole, R-NC, who introduced a meatier bill than Shelby's this year, have begun to pile on.

The bill, S.190, could empower the new regulator to set limits on or ban the use of Fannie and Freddie's automated underwriting systems if they "directly or indirectly" infringe on a primary market activity, according to an analysis by National Mortgage News. The bill provides that the GSEs are not permitted to "directly or indirectly" participate in activities involving the "underwriting of a loan for origination."

Fannie and Freddie's automatic underwriting systems include bolt-ons for everything from ordering appraisals to AVMs.

Meanwhile, the GSEs' current regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), has been leaning on Fannie. Last week, at OFHEO's prompting, Fannie agreed to several new internal, accounting and corporate governance rules including separating its CEO and Chairman of the Board positions, creating an internal Office of Compliance and Ethics and – we are not making this up – implementing "controls surrounding accounting ledger journal entries, including policies that prohibit the falsification of signatures."

To cut costs in advance of a deadline to boost its capital cushion against risk by 30 percent, Fannie has stopped awarding senior managers stock options, issued about $5 billion in preferred stock, slashed its dividend payout and has been shrinking its portfolio of loans.