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MEDIA VOICES: GSEs may see reforms |
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Daily Herald
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From the Washington Post, Monday, April 28, 2008:
The cause of reforming government-sponsored enterprises (GSEs) may not be a lost one after all. Last week, a meeting involving Treasury Secretary Henry M. Paulson Jr., Senate Banking Committee leaders and the heads of the GSEs -- Fannie Mae and Freddie Mac -- ended with all sides pronouncing themselves ready to settle the issue at last. The House passed a bill to tighten regulation of the mammoth mortgage companies almost a year ago, but the effort stalled in the Senate. Sen. Richard C. Shelby, Ala., the ranking Republican on the Banking Committee, had well-founded concerns that a new law might be too weak. Now he appears willing to deal.
Since another opportunity to craft a good law may not come around soon, it is essential that Congress get it right this time. If the lawmakers achieve nothing else, they must at least provide solid assurances that the GSEs maintain a sufficient capital base. Under current law, Fannie and Freddie are required to hold a reserve fund equal to 2.5 percent of their assets -- only half the ratio required of commercial banks. That thin layer of protection reflects the implicit guarantee of a federal bailout that the GSEs enjoy. (The GSEs have held somewhat more in reserve in recent months due to a temporary agreement with their regulator.) But given the immense size of the GSEs -- they currently hold or guarantee $5 trillion worth of mortgages, about 80 percent of the market -- everyone would be better off if they could rely more on their own resources.
At the moment, the firms' losses are significant: $3.6 billion in the fourth quarter of 2007 for Fannie and $2.5 billion for Freddie. Losses could grow as Fannie and Freddie take on more risk to help prop up the housing market. And if you think the economy looks shaky now, just watch what happens if a GSE goes belly up.
With great wealth and power come great responsibility. The GSEs must be more closely supervised, because the national interest comes first.
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