The Democrats Sure Like Fannie Mae

The New York Times reports:

In a four-page letter to Senator Charles E. Schumer, Democrat of New York, that it made public, the regulator also noted that both Fannie Mae and Freddie Mac, its smaller corporate cousin, remain “significant supervisory concerns.” Both companies are still getting their financial statements in order after Ofheo investigators found lax internal controls and accounting errors totaling $11.3 billion.

Even with the Ofheo decision, Fannie Mae can still purchase mortgages and issue securities, guaranteeing that the underlying mortgages will not default. Those guarantees are still accepted by investors, but the government-sponsored enterprise is now brushing up against the legal limits on the loans it can hold. There is no cap, however, on the amount of loans that Fannie Mae can package into securities, ensuring that conventional mortgages will continue to be widely available to home buyers.

Yesterday’s public exchange followed a week of political maneuvering in Washington as Wall Street watched global markets swing wildly up and down. Investors are increasingly worried that problems in the subprime market are spreading to other areas of the economy, causing lenders to tighten up the easy money that let buyout firms snap up big companies and allowed millions of Americans to buy homes.

Fannie Mae seized on those anxieties to make a case to federal regulators that raising its portfolio limits could ease tension in credit markets and help prop up the housing market. It lined up supporters that included longtime political allies, like Democratic lawmakers, as well as sometime rivals, like Wall Street banks that would benefit from its stepping in to buy more loans.

But Fannie’s critics, including many Republicans, argued that its motives were driven more by a desire to bolster its bottom line. They also bristled at the prospect that Fannie Mae could take advantage of the turmoil to be seen as a white knight.

“This is very much a buyer’s market,” said Bert Ely, a banking consultant in Arlington, Va., “and they want to come in and take advantage of rock-bottom prices. They could buy very favorably or sell later. Politically, they are chafing under both the investment limitations proposed by Ofheo as well as the conforming loan limit.”

Even President Bush weighed in. On Thursday, he said that both Fannie Mae and Freddie Mac needed to complete a “robust reform package” before they expanded their mortgage portfolios.

The statement drew fire from many Democratic lawmakers on Capitol Hill.

Christopher J. Dodd, the chairman of the Senate Banking Committee, called upon President Bush to “immediately reconsider his ill-advised” position as problems in the housing market worsen.

In an interview yesterday, Barney Frank, the chairman of the House Financial Services Committee, said that the president’s comments were “inane.”

“Tell the Republicans to stop blocking the bill,” Mr. Frank said. If the president “is saying that ‘I don’t want to support any increase until we pass the reforms,’ then you pass the bill and the bill takes care of that.”

Mr. Frank, like many Democrats, argued that increasing Fannie Mae’s mortgage portfolio was important because the government-sponsored enterprises could provide both liquidity to the market and were more willing to work out problem loans.

But others suggested that the move would mainly help Fannie Mae’s financial performance.

Josh Rosner, a managing director at Graham Fisher & Company, said that it was unclear whether Fannie would be using the portfolio to generate profits for shareholders by buying illiquid secondary market securities or help potential homeowners.

“Their spreads are still pretty tight. They don’t need the portfolios to do business,” Mr. Rosner said. “They are one of the only places in the mortgage world that can actually securitize.”

Besides, he said, it would be absurd to increase the size of their holdings until the extent of their exposure to subprime loans and other exotic mortgage products, like interest-only and negative-amortization loans, was better known.

“We don’t know the true condition of their books, because they still aren’t current in their filings; they still have internal- control weaknesses,” Mr. Rosner said.

Who says Democrats are against big business with kinky accounting? When it comes to Fannie Mae some people lose their sense of logic.