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Greenspan Faults GSEs

Proving once again that he's no friend of the GSEs, Federal Reserve chairman Alan Greenspan last week implored Congress to curb their growth and even privatize them.

But most members of the Senate Banking Committee weren't buying, especially chairman Richard Shelby, R-Ala., who made it clear to reporters after two days of hearings that he has no intention of limiting the growth of Fannie Mae and Freddie Mac.

Politically speaking, privatization isn't an issue as Congress considers legislation to create a strong independent regulator for the two as well as the Federal Home Loan Bank System.

However, the committee chairman, a key player in shaping legislation to strengthen GSE regulation, said members of the panel are cognizant of chairman Greenspan's concerns about their growth, size and potential risk to the U.S. economy.

Mr. Greenspan previously had shocked the industry somewhat by saying that as a "goal" he favors privatizing the two mortgage giants and at the very least he would like to see some type of limits on their growth by putting constraints on their debt issuance.

"I think a lot of the industry was surprised at what Greenspan said," noted one mortgage official. "I don't think anyone thought he would say it this strongly."

It's no secret that in the past the Fed chairman, a free market thinker, has questioned the two's federally protected role in the mortgage market.

Admitting that his view on privatization "is in the minority," he feels that it's essential to the U.S. economy to eliminate, as much as possible, the two's federal subsidy and their ability to grow their on-balance sheet assets.

He said the government should do this before the companies - which he described as well managed and financially healthy - become a crisis for taxpayers "many years hence."

Chairman Greenspan testified that he believes the two's borrowing advantage in the debt market is an "abnormality" and the companies are squeezing out competitors. He called the current structure of the GSEs "opaque and circuitous."

He said if the two go private, it could be a potential boon to GSE shareholders. He also cited recent research done by the Fed that found that their role in the secondary market reduces mortgage rates for consumers by a mere seven basis points.

Executives at both GSEs rebutted Mr. Greenspan's remarks on curbing their growth, privatization and their effect on mortgage rates.

Fannie Mae senior vice president Jayne Shontell said Mr. Greenspan's testimony "does not appreciate the role of our mortgage portfolio," saying the company's ability to invest in MBS reduces mortgage costs to consumers and makes fixed-rate loans more available.

A Freddie Mac spokeswoman said, "The issue of debt is critical to fulfilling our housing mission. We think the growth of our retained portfolio is very important to that."

At last check, Fannie and Freddie had outstanding debt of $2.317 trillion. By comparison the U.S. government has $6.7 trillion in outstanding debt.

Even though GSE debt does not have the full faith and credit of the U.S. government, the capital markets assume that if either or both firms go broke the Treasury will bail out debt holders.

Mr. Greenspan said this "implicit" guarantee is the fault of investors in the capital markets. But he said it allows Fannie and Freddie to "harvest" their federal "subsidy" which is their ability to borrow more cheaply than other mortgage investors. The Fed chairman noted that it's their on-balance sheet growth that worries him the most.

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