When President Bush, Congress, and Alan Greenspan call for restraining your business, it might reasonably be dismissed as a simple nightmare. But Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) face that very real scenario, and the pressure has mounted over the past month.
Last week, the House Financial Services Committee approved legislation that would create a more powerful regulatory body to oversee Fannie and Freddie. That agency would take over the reins from the Office of Federal Housing Enterprise Oversight (OFHEO). The Bush administration has called for stronger regulation of the mortgage giants for nearly two years.
The U.S. government created Fannie and Freddie to prime the mortgage market's pump by buying loans from lenders. They then package those loans into securities known as derivatives and sell them to investors. Under OFHEO's watch, both ran afoul of accounting rules, prompting concern about the harm that would be done to the derivatives market should either or both of these companies fail.
Fannie and Freddie together have an absolutely enormous portfolio of loans -- $1.5 trillion worth, which Fed Chairman Greenspan has warned is dangerously large. "The Federal Reserve has been unable to find any credible purpose for the huge balance sheets built by Fannie and Freddie other than the creation of profit through the exploitation of" the government's implied backing, Greenspan recently told an audience.
Nonetheless, the legislation moving through Congress creates a new regulatory body but doesn't curtail Fannie and Freddie's business to the extent sought by Greenspan and the Bush administration. In fact, it could actually increase Fannie and Freddie's reach by boosting the maximum size of loans they can buy from lenders.
That provision is auspicious, given that home prices are escalating to new highs. In April, the median price of previously owned homes sold in the United States topped $200,000 for the first time ever. If the provision increasing the maximum loan size is approved, Fannie and Freddie would be able to buy bigger mortgages to take advantage of that trend.
On Wednesday, Fannie Mae dropped the "interim" from Daniel Mudd's title, making him permanent CEO and president. He took over the top job in December when Franklin Raines was kicked out shortly after the SEC said Fannie had misstated earnings for more than three years.
Fannie continues to shore up its balance sheet. The company's future is of particular interest to us Fools because Fannie is a recommendation of our Motley Fool Inside Value newsletter.
Fannie's stock price already reflects any decrease in the company's growth that could result from tighter regulatory scrutiny. Though the stock is down since Inside Value investment guru Philip Durell recommended it in January, we're still excited about its long-term prospects.
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Nick Baker doesn't have a mortgage, and he doesn't have a financial stake in any company mentioned in this article. View his stock profile here. The Motley Fool has a disclosure policy.
