Congress must protect home buyers and taxpayers

Congress returned to Washington after the 4th of July holiday with a list of items to address before the August break, and I was hoping Government Sponsored Enterprise reform would be one of them. Let me tell you why.

America is facing a mortgage crisis, in part because the two companies charged with supporting affordable home ownership fell down on the job. According to the Center for Responsible Lending, more than 2 million families have lost or are about to lose their homes and millions of others are falling behind in their mortgage payments because of certain types of high-risk subprime mortgages.

Fannie Mae and Freddie Mac, the taxpayer subsidized Government Sponsored Enterprises (GSEs), have been instrumental in enabling the sale of these high-risk loans to consumers. As Jesse Jackson testified in February before the Senate Banking Committee, "Fannie Mae is purchasing securities that include the very loans that are stripping working-class people of their precious home equity. ... In purchasing such securities and profiting from predatory loans, Fannie Mae is violating its public mission."

In April, BusinessWeek reported that Freddie Mac owns $124 billion in securities backed by loans to risky borrowers, while Fannie Mae owns $58 billion. Of course, this may just be the tip of the iceberg, and the two GSEs may have invested many more billions in the subprime market. Moreover, a large portion of the loans in question are disproportionately for mortgage refinances rather than for the purchase of homes, and the primary reason for such investments is not to increase home ownership or to help families stay in homes, but to generate higher profits for the companies.

Now that the foreclosure rate is accelerating and millions of families are at risk of losing their homes, Fannie Mae and Freddie Mac have come forward with pledges to help distraught homeowners. Given his company's deep involvement in promoting and benefiting from the subprime market, it is hard to believe that Fannie Mae's chief executive officer told the House Financial Services Committee that his company "gave up significant market share to our competitors" by staying away from the purchase of subprime loans. He claimed that "our disciplined approach to the subprime market has helped to protect our company, our lenders and our borrowers from the turmoil."

Judy Kennedy, president and chief executive officer of the National Association of Affordable Housing Lenders, recently told Congress, "The market has evolved by adapting to what the GSEs will buy." While the GSEs may not have directly purchased the riskiest subprime loans, they clearly have not shied away from making significant purchases of mortgage-backed securities containing pools of subprime loans. Additionally, Fannie Mae and Freddie Mac set the terms and conditions for the purchase of these securities.

Several years ago, Fannie Mae testified before Congress that the company's accounting system was second to none. It wasn't long after those words were spoken that federal investigators and other investigators hired by the company uncovered massive accounting problems that showed the company had vastly overstated its earnings. The bottom line -- Fannie Mae's accounting systems were a disaster from which the company has yet to fully recover.

While problems in the accounting system affect the company and its stockholders, problems in the purchase of high-risk subprime securities have much wider and potentially more adverse impacts, including families at risk of losing their homes and broader turmoil in financial markets.

Despite belated guidance on nontraditional mortgage loans recently issued by the GSE's current regulator, the Office of Federal Housing Enterprise Oversight, a much stronger regulator is clearly needed. Under current law, the federal government does not have all the tools it needs to oversee these giant companies that have such a profound connection to America's housing and financial markets and that, because of lax regulation, have enabled the current subprime meltdown.

Given the GSE's less-than-judicious participation in the subprime mortgage market, on top of their accounting and other problems, many in Congress agree that the companies must be subject to much stronger regulation.

In April, the House took the first step in reforming federal oversight with bipartisan passage of comprehensive legislation. The issue is now before the Senate Banking Committee whose chairman, Sen. Chris Dodd, has said passing legislation is a top priority. Clearly it is, now more than ever. I'm hoping that the Senate will move on this legislation to protect the American home buyer and the American taxpayer.

J.C. Watts ( is chairman of FM Policy Focus, a coalition of financial service and housing-related associations seeking reform of Fannie Mae and Freddie Mac. He is also former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002. He writes twice monthly for the Review-Journal.