A group dedicated to drawing a box around Fannie Mae and Freddie Mac has been mockingly called "The Coalition for Higher Loan Costs" by the two government-sponsored enterprises. They say that in reality, FM Watch is nothing more than a front for the private mortgage insurance industry.

But that claim is about to be undermined by the Mortgage Bankers Association, which is readying a policy statement that calls on Fannie Mae and Freddie Mac to cease and desist from, among other things, forcing their technology on primary lenders and charging exorbitant guaranty fees.

To be sure, the MBA, whose members depend on the two GSEs to purchase their loans on the secondary mortgage market, hasn't joined FM Watch, which wants to make sure Fannie and Freddie don't go beyond their federally-drawn charters. But its position paper reads remarkably similar to the stance taken by the coalition of eight other trade associations, including, as Fannie and Freddie are quick to point out, the Mortgage Insurance Cos. of America.

Moreover, MBA President Donald Lange says that while his organization wasn't sure the two groups could be aligned, their intent now "seems to correspond reasonably well."

More important, though, the MBA's stand is an unusually strong one. Normally, the MBA treats Fannie Mae and Freddie Mac with kid gloves. After all, without the GSEs, lenders would either have to hold on to their loans, which means they'd quickly run out of money, or they'd have to find other buyers, which would be more costly, not only to them but to home buyers.

But worried that the two federally chartered but publicly owned firms would eventually move onto their turf, many mortgage bankers have become increasingly vocal of late. Some have wondered just how far Fannie and Freddie will go, suggesting that maybe pizza delivery, computer dating and astrology might be next on their agendas.

Perhaps that's why the MBA policy statement, which has been approved in principle and is now going through its final filtering process, according to Lange, underscores the need to closely monitor the GSEs' activities to ensure they fall within the scope of their respective charters" and do not have the effect of "displacing or discouraging" private firms that don't have the government-bestowed advantages enjoyed by Fannie and Freddie.

Toward that end, the draft maintains that the GSE's regulators "must be independent and well funded," and have the power to compel the agencies to follow the rules. Oversight "must be carried out be entities with the resources and expertise to evaluate the GSEs' performance both as financial institutions and as public purpose entities," it says. "The regulators must have the capacity to enforce their findings."

Noting that the unique structure of the GSEs "creates an inherent conflict" between their public purpose goals to provide stability in the residential mortgage market and their private sector goals of maximizing shareholder profits, it says the agencies should not use their advantages to compete in the private mortgage market or displace private capital.

And warning that a "clear separation" between the roles of primary lenders and the GSEs, the draft GSE policy statement also calls for prohibitions against Fannie Mae and Freddie Mac's participation in "any primary market activities."

In that regard, the statement says the GSEs should continue to introduce new products and services "only when they relate to the core functions of providing liquidity and stability in the secondary mortgage market." But it is in the area of technology where the MBA is considering taking perhaps its boldest stand, a position that Lange said surprised even Fannie Mae and Freddie Mac.

While the association supports the development of technology focused on Fannie Mae and Freddie Mac's internal risk management and operations, it says the GSEs must be prohibited from engaging in primary market activities that fall beyond their charters when they engage in outside distribution.

The position paper says the agencies already have destroyed the equilibrium in housing finance with their technology, which is required with some affordable housing loans Fannie and Freddie purchase. "Specifically," it says, "the technologies have been developed in a subsidized environment, yet have served to discourage development of competing systems from the private sector, thereby limiting competition and innovation."

Published: July 5, 1999

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Editor's Note: This article reflects the opinions of Lew Sichelman only and not necessarily the views of this or any other publication, organization or Website owner.