Freddie Mac’s problems resulted in a familiar spasm of oversight activity on Capitol Hill.
Congress has reacted by seeking to change the way the Government Sponsored Enterprises (GSEs) are regulated.
The Office of Federal Housing Enterprise Oversight had been widely regarded as a somnolent and toothless regulator, but as Freddie’s problems unfolded it discovered its teeth and started using them. In September, OFHEO retrospectively fired Brendsel and Clarke.
This show of vigour may have come too late to save OFHEO, however. There is growing agreement that Fannie Mae and Freddie Mac, and possibly the Federal Home Loan Banks, will end up being supervised by an agency under the aegis of the Treasury.
The Treasury is rightly worried that such a change might strengthen investors’ impression that there is an implied Federal guarantee of the housing GSEs.
Still, a new Treasury-governed regulator with greater resources and more clout is likely to be put in charge of supervising the agencies’ finances. The Department of Housing and Urban Development, which oversees OFHEO, wants to retain jurisdiction over new business ideas.
The timetable is unclear, however. With the US presidential election due in 2004, it is not clear when, or indeed whether, there will be any progress in reforming regulation.
Freddie Mac and Fannie Mae are vital components of a home financing system that has given US voters access to affordable home ownership.
In the run-up to an election, few politicians will be tempted to try anything that could be portrayed as raising the price of homeownership — which plays a far greater role in the US political psyche than it does elsewhere.
That means politicians in Washington will be very concerned not to do anything that might cause agency spreads to widen further. The higher Freddie and Fannie’s cost of funds, the higher the average voter’s mortgage payments.