WASHINGTON — The White House said Monday that the federal takeover of troubled mortgage giants Fannie Mae and Freddie Mac could have been prevented if Congress had acted on its recommendations for changing the system, but housing experts say it’s more complicated than that.
“It is exactly the kind of event we warned about and tried to prevent over the years,” said White House press secretary Dana Perino.
She said the White House has asked Congress “for years” to establish a strong independent regulator to oversee the institutions.
Fannie and Freddie were created by Congress to pump money into the mortgage market and thus keep interest rates low and make homeownership affordable for low- and moderate-income people, by buying home loans from lenders that frees them to make more loans. The companies have grown to the point that they together own or guarantee about $5 trillion in home mortgages, about half the nation’s total.
However, the administration’s message on the companies has been mixed. As recently as July, the administration’s regulator of the two mortgage giants said they had adequate capital.
Most housing experts think that the problems that brought down Fannie and Freddie went far beyond the type of regulation that Bush had proposed, much of which was finally imposed on the two organizations this summer. Although tighter regulation, enacted earlier, perhaps would have kept the two institutions from engaging in some of their riskier practices, they also were functioning in a highly unstable housing environment.
Among other developments:
• Fannie Mae Chairman Stephen Ashley, ex-chief executive Daniel Mudd and two other former executives were accused in a shareholder lawsuit of misleading investors about the mortgage company’s finances. The lawsuit, filed Monday in Manhattan federal court by investor John Genovese, seeks class-action, or group, status and unspecified damages. It alleges securities fraud violations.
• Treasury officials found Fannie and Freddie were “playing games with their accounting” to meet reserve requirements, prompting the government to seize control of the companies, said U.S. Senator Richard Shelby.
“They found out they had a house of cards,” said Shelby of Alabama, the ranking Republican on the Senate Banking Committee.
Shelby said Treasury officials told him in a briefing Monday that “once they got someone looking closely at Fannie and Freddie’s books, they realized there just wasn’t adequate capital there.”
In 2003, Bush asked Congress for a stronger government hand over the two government-sponsored entities, in the form of a regulator with the ability to control the companies’ activities and oversee their accounting practices. The administration also has wanted the companies’ massive mortgage portfolios reduced to lessen the risk of any problems affecting the overall system. Other points of criticism have been the fact that the companies, by virtue of their special status, can keep smaller capital reserves on hand than other financial institutions.
Former Federal Reserve Chairman Alan Greenspan, a Republican re-appointed by Bush, contributed to this by keeping interest rates too low for too long, triggering a housing bubble that sent prices soaring to unsustainable levels. In addition, Greenspan blocked efforts to impose stronger controls on subprime mortgage lending. It has been surging defaults in this riskiest category of lending that have been a major contributor to the mortgage crisis.
