Fannie Mae’s Riskier MBS Activities Ought to Be Subject to Scrutiny

(Washington, D.C.) — Today Citizens Against Government Waste called for more extensive disclosures by two government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.  This comes in the wake of the recent revelation that Fannie Mae’s duration gap between its mortgage assets and its debt liabilities, had widened to 14 months.  This follows a  nine-month duration gap in July, both of which mark a surprising development, given the company’s own stated policy of maintaining a duration gap of six months or less. 

“Fannie Mae apparently gambled that interest rates would not stay at record lows, but would begin to go back up, and that the flood of mortgage refinancings would slow.  It miscalculated badly and that will hurt its finances and credibility,” CAGW Vice President Leslie K. Paige said.  “Fannie Mae should submit a full and public accounting of its risk management strategy and what went wrong.  But the more important issue is that if Fannie Mae officials had stayed with their core mission, buying conventional home mortgages and reselling them to private investors, it wouldn’t have this problem.  Instead, its energies are  focused on extremely ambitious earnings goals for its stockholders.  In order to boost profits, Fannie Mae is buying huge amounts of its own mortgage-backed securities (MBS),  a policy that demands more intensive derivatives trading and more speculative hedging strategies.  The GSEs are now so big and so embedded in our capital markets, indeed, in our whole economy, that a slip-up could have ramifications for everyone.  If we had a more comprehensive disclosure regime for both GSEs, we would know a lot more about its hedging strategy.  Congress should bring both GSEs into line with the nations’ financial disclosure rules.” 

 “There is only one reason that Fannie Mae and Freddie Mac buy back their own MBS, and it’s not to further the goals of America’s first-time homebuyers.  The repurchase of MBS serves only to line GSE executives’ and stockholders’ pockets.  Unfortunately, it also puts the taxpayers at increased risk.” 

“Because of the GSEs’ unique relationship to the Federal Treasury,  Congress should demand that Fannie Mae file a formal, public explanation of its trading strategies with the Office of Federal Housing Enterprise Oversight (OFHEO),  (SEC), and the Treasury, which are currently studying the MBS market as a follow-up to the GSEs’ July announcement that they would begin to comply with some aspects of the SEC’s disclosure requirements for publicly-held companies.  Under pressure, Fannie Mae and Freddie Mac agreed to voluntarily comply with SEC disclosure rules on their common stock.  So far, this agreement has been spelled out in only the vaguest terms,”  Paige continued. 

“But we do know that the agreement shields the GSEs’ growing MBS portfolio from SEC scrutiny, and here is where their risk profile increases dramatically and where serious miscalculations, like the surprising jump in the duration gap, could occur.  “It is imperative that Congress bring these two mortgage giants under a mandatory, comprehensible, uniform disclosure regime, just for a start.  H.R. 4071, co-sponsored by Reps. Chris Shays (R-Conn.) and Ed Markey (D-Mass.), would ensure that investors and taxpayers have the same financial information about the GSEs that they get about every other publicly- traded company.  Until then, there is no real way of determining Fannie Mae and Freddie Mac’s true risk profile.  The taxpayers, who would be left to bail them out in a financial crisis, deserve to be protected as much as possible.”   

Citizens Against Government Waste is the nation's largest nonpartisan, nonprofit organization dedicated to eliminating waste, fraud, abuse, and mismanagement in government.  For more information about our organization and issues see our website at www.cagw.org