A restatement of Clinton administration policy by a Treasury Department undersecretary has re-ignited a conflict between the backers of Fannie Mae and Freddie Mac against private interests that believe it's time to reign in the two sprawling government-sponsored enterprises.

In recent remarks on Capital Hill, Undersecretary Gary Gensler recommended that Congress eliminate the never-used $2.25 billion line of credit at the Treasury that is reserved for Fannie and Freddie to use in case of an emergency.

The statement was immediately interpreted on Wall Street as a shift in Clinton administration policy, when in fact it was a restatement of a long-standing philosophy that the earmarked line of credit isn't really necessary for the two, extraordinarily strong, stock-holder owned corporations.

Before calm was restored, however, Fannie Mae CFO Timothy Howard had called Gensler "irresponsible" and "inept," and Freddie spokeswoman Sharon McHale said Gensler had showed "utter contempt for the nation's housing and mortgage markets."

The extremity of the backlash shows the nervousness of both the GSEs and Wall Street any time the notion comes up that Fannie and Freddie no longer need the backing of the federal government.

An organization called FM Watch, launched a few years ago by private bankers, already complains that Fannie's and Freddie's spread into software, insurance and other areas - coupled with their ability to borrow money at artificially low rates because of their federal backing - has made it hard for the private sector to compete.

Fannie and Freddie were created to help bring stability to the housing market, making sure that money was continually cycled back to banks. They also are under a federal mandate to make home ownership more affordable for lower-income buyers by authorizing low-downpayment loans and other vehicles that help the poor.

However, the GSEs also buy loans up to $250,000 - which private mortgage insurers say puts them squarely in competition with the private sector.

FM Watch includes mortgage insurer Amerin Corp. and major trade groups such as the Financial Services Roundtable. The watch dog organization has hired lobbyist Haley Barbour, former chairman of the Republican National Committee, to put pressure on Congress to end the government's relationship with GSEs.

Although there is unlikely to be any change in the status of the GSEs in the foreseeable future, the pressure is expected to continue.

Chief among arguments is whether they really need the backing of the government since, as a practical matter, if a crisis hit either institution the government most likely wouldn't let them fail anyhow - stepping in to bail them out, just they have with other financial institutions in the past.

Published: March 28, 2000

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