Agency spreads may widen out if the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator for Fannie Mae and Freddie Mac, gets a new director and receives the extra $19.3 million in funding it is seeking from Congress.
Wayne Abernathy, assistant Treasury secretary for financial institutions, is being mentioned as a potential replacement for Armando Falcon, the organization's current interim director. Abernathy has been the point person for the Bush Administration's views on government-sponsored enterprises and is seen as a potentially aggressive leader of OFHEO. If appointed, Abernathy is expected to keep the watchdog's focus on Fannie's and Freddie's accounting, delay reducing or removing the agencies' 30% capital requirement and press Congress for substantial appropriations to beef up staff, according to Arthur Frank, director of MBS research at Nomura Securities International.
As a result, an OFHEO leader with a bigger bark--and bite-- may generate some spread volatility in the short run. However, in the long run, changes at OFHEO may bode well for bondholders. "If tougher regulation causes Fannie and Freddie to be less leveraged, then you would see a virtual stoppage of Fannie and Freddie growth," Frank said, noting growth of their portfolios has been a significant concern of agency investors.
Increased funding is unlikely to come without a change at the top though. Sen. Kit Bond (R-Miss.), chairman of the Senate Appropriations subcommittee and author of the bill that includes OFHEO's funding increase, recently added a provision to withhold $10 million from its 2005 budget until a new director is nominated and confirmed. Falcon's term officially ended on Oct. 5 and he has stated he does not wish to serve for another term.
Brookly McLaughlin, spokeswoman for Abernathy, declined comment.
