Last year the two giants of the US housing loan industry - Fannie Mae and Freddie Mac - seemed likely to face tighter reins on their government-linked operations and privileges. That threat appears to have diminished. There were growing concerns at the time over the growth of the total debt held by such housing-related "government sponsored enterprises" (expected to surpass the federal debt in 2005) and their deeper entry into higher-risk loan markets, as well as their financial health and the implicit government guarantee many believe subsidises their actions.
These matters were expected to push lawmakers toward harsher regulation to curb what is seen by some as a growing, unbridled risk to the US taxpayer and the stability of the US financial system. Fannie Mae, formerly known as the Federal National Mortgage Association, and Freddie Mac, formerly the Federal Home Loan Mortgage Association, are publicly traded companies with a combined market capitalisation of more than $120bn (bigger than Cisco Systems). They buy mortgages from commercial lenders and repackage them as securities for resale in secondary markets, assuming default risk.
Their federal charters to broaden home ownership in the US, a popular mandate, their lines of credit to the federal government and the subsequent perception that they enjoy the government's backing, along with other exclusive privileges, allow them to raise debt cheaply. Investors seem to think the chill wind of scrutiny appears, so far, to have blown over.
Last year stock prices for both, weighed down by investor concerns over regulation prospects, significantly underperformed against industry and market-wide averages. But since September their shares have risen more than 50 per cent to all-time highs, even as the overall stock market has plunged. "While legislation could become law this year, it would not likely have a major adverse impact," said Andy Laperriere, a policy analyst in Washington with the International Strategy and Investment Group, in a recent report to clients.
Fannie Mae and Freddie Mac have been accused of using their implicit subsidy to steal business from others and have recently faced allegations of intimidating private lenders. Last year Alan Greenspan, Federal Reserve chairman, said the implicit subsidy created distortions that in effect raised costs for the rest of the economy and merited renewed congressional oversight.
In a testament to the popularity the two groups enjoy and the sensitivity of the issue, Paul O'Neill, treasury secretary and a man not widely known for mincing words, said recently, in response to a pointed question from a reporter: "Does somebody have a question about foreign exchange rates they'd like to ask?" He later said Fannie Mae and Freddie Mac were "important institutions in our society".
The "essential" question, Mr O'Neill said, was whether the US should give "preferential treatment" to the financing of home ownership. "There are people who believe, I think in good faith, that the answer is no," he said. "It's a legitimate conversation, and I think it should go on."
It will. The Congressional Budget Office is expected soon to release estimates of the size of the subsidy enjoyed by both companies. The White House is reviewing a "stress test" of both institutions' finances conducted by the Office of Federal Housing Enterprise Oversight (OFHEO), which shares regulatory oversight with the Department of Housing and Urban Affairs.
The Chicago Federal Reserve plans to hold a conference on the issue in early May. Fannie Mae and Freddie Mac have agreed generally to higher financial standards. Mr Laperriere believes great uncertainty about the danger they pose, if any, will continue to restrain lawmakers, but he also believes continued growth in their outstanding debt will inevitably lead to greater scrutiny and restrictions.
Richard Baker, a Republican from Louisiana who heads the House banking committee and has taken a leading role in the issue, is expected to introduce a bill this week to boost funding for existing regulation and to consolidate all regulatory powers within the Treasury Department or the Fed.
These matters were expected to push lawmakers toward harsher regulation to curb what is seen by some as a growing, unbridled risk to the US taxpayer and the stability of the US financial system. Fannie Mae, formerly known as the Federal National Mortgage Association, and Freddie Mac, formerly the Federal Home Loan Mortgage Association, are publicly traded companies with a combined market capitalisation of more than $120bn (bigger than Cisco Systems). They buy mortgages from commercial lenders and repackage them as securities for resale in secondary markets, assuming default risk.
Their federal charters to broaden home ownership in the US, a popular mandate, their lines of credit to the federal government and the subsequent perception that they enjoy the government's backing, along with other exclusive privileges, allow them to raise debt cheaply. Investors seem to think the chill wind of scrutiny appears, so far, to have blown over.
Last year stock prices for both, weighed down by investor concerns over regulation prospects, significantly underperformed against industry and market-wide averages. But since September their shares have risen more than 50 per cent to all-time highs, even as the overall stock market has plunged. "While legislation could become law this year, it would not likely have a major adverse impact," said Andy Laperriere, a policy analyst in Washington with the International Strategy and Investment Group, in a recent report to clients.
Fannie Mae and Freddie Mac have been accused of using their implicit subsidy to steal business from others and have recently faced allegations of intimidating private lenders. Last year Alan Greenspan, Federal Reserve chairman, said the implicit subsidy created distortions that in effect raised costs for the rest of the economy and merited renewed congressional oversight.
In a testament to the popularity the two groups enjoy and the sensitivity of the issue, Paul O'Neill, treasury secretary and a man not widely known for mincing words, said recently, in response to a pointed question from a reporter: "Does somebody have a question about foreign exchange rates they'd like to ask?" He later said Fannie Mae and Freddie Mac were "important institutions in our society".
The "essential" question, Mr O'Neill said, was whether the US should give "preferential treatment" to the financing of home ownership. "There are people who believe, I think in good faith, that the answer is no," he said. "It's a legitimate conversation, and I think it should go on."
It will. The Congressional Budget Office is expected soon to release estimates of the size of the subsidy enjoyed by both companies. The White House is reviewing a "stress test" of both institutions' finances conducted by the Office of Federal Housing Enterprise Oversight (OFHEO), which shares regulatory oversight with the Department of Housing and Urban Affairs.
The Chicago Federal Reserve plans to hold a conference on the issue in early May. Fannie Mae and Freddie Mac have agreed generally to higher financial standards. Mr Laperriere believes great uncertainty about the danger they pose, if any, will continue to restrain lawmakers, but he also believes continued growth in their outstanding debt will inevitably lead to greater scrutiny and restrictions.
Richard Baker, a Republican from Louisiana who heads the House banking committee and has taken a leading role in the issue, is expected to introduce a bill this week to boost funding for existing regulation and to consolidate all regulatory powers within the Treasury Department or the Fed.
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