Fannie Mae, the nation’s top source of financing for home mortgages, will likely survive the accounting problems, investigations, and regulatory actions that it now faces – and it must – say some industry sources. The government-sponsored entity is too important to the housing market to be dismantled or rebuilt, they say.
In the last week, Fannie Mae’s stock has dropped 18 percent, equivalent to $16 billion in market capitalization. The U.S. Congress has launched a committee hearing on the firm’s accounting woes, and the Office of Federal Housing Enterprise Oversight issued a scathing report on Fannie Mae.
The stakes are high: Fannie Mae and Freddie Mac, another secondary mortgage market titan, together own or guarantee about half of the U.S. mortgage market. Fannie Mae alone has provided an estimated $6.3 trillion in mortgage financing for 63 million families since 1968.
“We’re certainly confident that Fannie Mae is going to be with us for many years to come,” said Steve Cook, a spokesman for the National Association of Realtors. “We’ve consistently supported the (government-sponsored entities) over the years. They have had a dramatic impact in making housing more affordable in America.”
Today, Fannie Mae and its regulator, the OFHEO, announced a series of actions that are planned to correct management and accounting problems.
Fannie Mae is a private, shareholder-owned company that works to provide a supply of mortgage funds to lenders by purchasing mortgages, pooling them and reselling them to investors as mortgage-backed securities. The entity has a particular focus on home ownership among low-income and middle-income people.
Mark J. Riedy, executive director of the Burnham-Moores Center for Real Estate at the University of San Diego, and a past president at Fannie Mae, said Fannie Mae isn’t going anywhere. “Somehow organizations that are good, strong organizations tend to survive and thrive.” Riedy said he has been detached from Fannie Mae for too long to know about the current operations at Fannie Mae, though he said its role in the housing market remains vital.
“Whatever went on in terms of allegations has nothing to do with their ability and their effectiveness in serving mortgage lenders, who in turn serve housing consumers,” he said. According to news accounts, some of the accounting troubles at Fannie Mae stem from derivatives, which are complex financial products that relate to the hedging of financial investments.
Riedy said that he hopes the punishment fits the crime for any problems that are uncovered at Fannie Mae, and he cautioned against punishing the entity with excessive regulations or other restrictions that impact its ability to serve the housing market. “If there’s a problem, don’t take it out on the housing market. (Federal agencies) shouldn’t go crazy with new rules and regulations and other restrictions. Don’t throw the baby out with the bathwater.”
In the case of past problems at Freddie Mac, Riedy said that entity “continued to serve the housing market well during its trials and tribulations. I hope Fannie Mae can continue to do the same.” Freddie Mac paid a $125 million fine relating to accounting problems that were revealed last year. Freddie Mac had reportedly understated profits by about $5 billion in 2000-02.
Sheila Crowley, president of the National Low Income Housing Coalition, a group that devoted to affordable-housing issues that receives some support from the Fannie Mae Foundation, said Fannie Mae “is an extremely important factor in the success of the American housing market and the whole way that our mortgage system is structured.”
And Harold Simon, executive director for the nonprofit National Housing Institute, a group that advocates for affordable housing and receives some research support from Fannie Mae, among other agencies, said, “It would be hard to imagine the home-ownership rate” for lower-income and minority home buyers without Fannie Mae’s support.
“In general they are a vital part of the whole process,” Simon said. “It’s really vital that whatever problems they have – those be resolved quickly and that they renew their mission to low- and moderate-income households. It would be a shame if they became totally privatized and no longer responsive to the needs of these communities.”
Though there is a congressional effort to move Fannie Mae and related mortgage entity Freddie Mac under the U.S. Treasury Department rather than the U.S. Department of Housing and Urban Development, Cook said he doesn’t expect there will be enough momentum to enact such legislation during the current session of Congress. “Our concern is that HUD continue to play a role in maintaining (Fannie Mae’s) housing mission,” he said.
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