LAST FALL, FANNIE MAE WAS caught playing with funny money. Congress, like a parent shocked by a child's behavior and resolved to change it with tough love, responded by beginning the process of re-regulating the Government Sponsored Enterprises (GSEs) known as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This is giving the home building industry a collective case of neuralgia: If Congress restricts the activities of the GSEs too tightly, builders fear the amount of mortgage money available to home buyers will shrink. And that, coupled with rising interest rates, could bring a golden age of profitability in the home building business to a jarring halt.
Of particular concern to production home builders is that their interests do not appear to be of primary concern to members of Congress. Two bills have been introduced, one in the Senate and one in the House, that would create an agency to regulate the GSEs, but neither provides for guaranteed representation from the building industry on the board of that new agency. In the meantime, the bills would lessen the influence builders currently have through the boards of Fannie and Freddie.
The primary concern of Congress, as well as Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow, is the financial stability of the GSEs. Fannie and Freddie back $1.5 trillion in residential mortgages between them, and while the quality of the mortgages they hold is high, the financial dealings and accounting practices they have used to pump up shareholder value have come under question. The fear in Washington is that if Fannie and/or Freddie were to collapse, an economic calamity (and a government bailout) would result.
Since last September, when Fannie was shaken by news that the Securities and Exchange Commission was looking into its accounting practices, its stock has fallen some 30 percent. By December, the SEC had found “irregularities” that resulted in a $9 billion overstatement of Fannie's assets. The Office of Federal Housing Enterprise Oversight (OFHEO), part of the federal Department of Housing and Urban Development, and Fannie's regulator, thus found a deficiency in the reserves that it requires to be held by Fannie. The Fannie Board dismissed the CEO, Franklin Raines, among others. By March, the possibility that another $2.8 billion could be added to the overstatement, resulting in a need to restate financial results for the past four years, had led the Justice Department to enter the investigation.
Builders are not necessarily against re-regulation, although they are concerned that too much regulation could upend the housing market. “Certainly, agencies which are quasi-governmental and so huge are deserving of very careful oversight and regulation,” said Toll Brothers CEO Bob Toll in a statement issued in response to a query from BIG BUILDER magazine. “However, through the legislative process, we must be careful not to throw the baby out with the bath water.”
Toll's fears were seconded by Jerry Howard, CEO of the NAHB, the lead organization lobbying Congress on behalf of home builders regarding regulatory reform of Fannie, Freddie, and the Federal Home Loan Banks. “We have to be very careful,” said Howard, adding that his greatest fear is that new legislation could have “unintended consequences.”
No Industry Representation One bill is the Federal Housing Enterprise Regulatory Reform Act of 2005, introduced in January in the Senate by Senators Chuck Hagel (R-Neb.), Elizabeth Dole (R-N.C.), and John Sununu (R-N.H.). It is currently in the Senate Committee on Banking, Housing, and Urban Affairs. In the view of NAHB's Howard, the bill goes “a little bit too far.”
The Hagel bill, as it is known on Capitol Hill, abolishes OFHEO and establishes a Federal Housing Enterprise Regulatory Agency in its place. The agency would be overseen by a Federal Housing Enterprise Board that would be led by the agency's director, who would be appointed by the president for a term of six years and have sweeping powers over Fannie, Freddie, and the Federal Home Loan Banks. The director also would serve as chairman of the board, which would consist of the Treasury secretary, the secretary of Housing and Urban Development, and the chairman of the Securities and Exchange Commission. There is no representation of the home building or commercial banking industry on the board.
In Howard's view, the bill gives representation to the Treasury Department, which the home building industry believes has an inherent bias against housing, since its primary purpose is to generate revenue. The current regulatory structure has Fannie and Freddie answering to HUD, the purpose of which is to encourage the building of low-and moderate-income housing. This is particularly important in the area of new program approval, in which new types of mortgage backed securities are created to increase homeownership. Representation with equal weight from pro-housing organizations is necessary, Howard said.
Other areas that concern the NAHB are the mission issues that drive Fannie, Freddie, and the Federal Home Loan Banks. The GSEs were created in the Depression Era to provide funding for commercial banks that could be used to issue mortgages. In that era, the norm was a four-year mortgage with a balloon payment at the end, and during the Depression, homeowners were losing their properties due to a lack of funds to pay off the mortgage. Later, another mission was added to the entities: Encourage the availability of mortgages to low- and moderate-income families. Today, some 51 percent of the enterprises' activities are associated with low- and moderate-income mortgages. The NAHB would like to see this percentage remain stable.