Who were the biggest losers in the American housing market last Tuesday when John Kerry went down in flames? That's easy: Fannie Mae and Freddie Mac, the two biggest sources of mortgage capital in the country.

Not only do they now face an openly antagonistic Bush administration that is determined to rein them in dramatically through the creation of a tough new regulatory agency. They also confront a Senate and House with significantly fewer friendly Democratic faces who can be depended on to soften -- or filibuster -- the Bush administration's reform plans for them.

To make matters even worse, on election day itself, Nov. 2, both companies were slammed with new federal demands to devote far more of their financing efforts toward mortgages for low and moderate-income home buyers. Both Fannie and Freddie say the Bush administration goals are needlessly high -- 56 percent of all their mortgage purchases must go to low and moderate-income home buyers by 2008, ascending annually from 52 percent in 2005 -- and could harm the firms' abilities to serve other portions of the market.

In controversial final regulations published in the Nov. 2 Federal Register by the U.S. Department of Housing and Urban Development (HUD), the administration lashed out at what it said was Fannie's and Freddie's "underperformance" in assisting minorities and first-time purchasers.

Whereas private, conventional market banks and other lenders devoted 38 percent of their mortgage financings to first-time buyers between 1999 and 2002, said HUD, Fannie and Freddie devoted only 27 percent of their purchases to first-time buyers during the same period. Fannie and Freddie devoted only 6.2 percent of their financings to minority first-timers during 1999-2002, said HUD, while private sector lenders devoted 10.6 percent.

Similar performance gaps were cited by HUD in other areas such as "affordable" housing lending. The department also accused Freddie Mac of "double counting" nearly 45,000 units against its goals in 2002. The units, according to HUD, had already been counted by Freddie towards its 2001 goals. HUD's regulation made no explicit reference to Fannie and Freddie's ongoing accounting, hedging and financial reporting problems that have caused the companies to come under sharp attack on Capitol Hill.

But HUD took prominent note of the companies' heavy federal subsidies and their "public purpose" duties stemming from their congressional charters. Both charters direct the corporations to lead the mortgage market in financing low and moderate households' home purchases, even if the net economic returns from such loans are "less than their returns on other activities," said HUD.

Both Fannie and Freddie warned the Bush administration that requiring them to devote such high percentages of their resources to low and moderate-income and affordable housing may force them to limit their services to other sectors of the market, such as middle-income purchases and refinancings. Private sector critics of Fannie and Freddie, however, argue that such limitations -- if indeed they ever occurred -- would be more than offset by private lenders who increasingly tap the same global capital markets funding pools that Fannie and Freddie use.

The bottom line of the Nov. 2 "housing goals" regulations: As long as the Bush administration is in power -- and that's four more years -- Fannie and Freddie will be required to direct increasing amounts of effort and money toward first-time and moderate-income home purchasers. While that may be nettlesome for them and their stockholders, it could be excellent news for homebuyers in that segment, and the Realtors who serve them.

Published: November 8, 2004

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.