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GSE risks may exceed benefits


WASHINGTON - Fannie Mae and Freddie Mac, the biggest sources of U.S. home mortgage financing, pose risks of instability in financial markets that might loom larger than their benefits in expanding homeownership, U.S. Comptroller General David Walker told a Senate panel yesterday.

"It is difficult for Congress, accountability organizations and the public to determine whether the benefits provided by the GSEs' activities are in the public interest and outweigh their financial risks," Walker told the Senate Banking Committee. "It is not clear that the housing GSEs' large holdings of mortgage-backed securities benefit borrowers."

Fannie Mae and Freddie Mac, because of their government charters, are called government-sponsored enterprises, or GSEs.

Freddie Mac, based in McLean, Va., restated earnings in November by $5 billion after disclosing that it had used trades to reduce swings in earnings from 2000 to 2002. In October, Washington-based Fannie Mae disclosed a $1.1 billion accounting error it had made in the third quarter. The companies' accounting irregularities spurred calls for a change in the way they are regulated.

Differing from the U.S. Treasury, Walker said he favors a new, independent regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks that would be run by a "hybrid" board similar to the Pension Benefit Guarantee Corp.

The new supervisory board would include the Treasury secretary, the housing and urban development secretary and perhaps the Federal Reserve chairman, Walker said.

Wayne Abernathy, assistant Treasury secretary for financial institutions, said Feb. 4 that the Bush administration wants the regulator to be under the Treasury secretary's direct control.

"They need to consider this hybrid model," Walker said after his testimony. "It may bridge the gap between" the Treasury and supporters of an independent regulator.

Next month, the Senate committee plans to vote on a bill based on a Treasury effort to tighten regulation of Fannie Mae and Freddie Mac and reassure taxpayers and investors about accounting problems at the two companies.

"The Congress cannot sit idly by after the events of last year," said Sen. Richard Shelby, the Alabama Republican who chairs the committee. Congress must "put in place a GSE regulator that has the necessary independence, strength and credibility to carry out its mandate."

Shelby favors creating a regulator outside the Treasury Department with power over the companies' capital standards and goals for making homeownership more affordable. He also wants to strengthen oversight over new lines of business.

"These changes would lead to the credibility that has been lacking" at the current regulator, the Office of Federal Housing Enterprise Oversight, Shelby said in a speech Saturday to the American Bankers Association.

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