Freddie Fumbles

One of two federally sponsored mortgage-finance companies fired three of its top executives Monday for not fully cooperating with an internal review of the company's accounting. (See story.) It was a further signal that these two giants in the housing market - Freddie Mac and Fannie Mae - need deep reform.

The crisis at the Federal Home Loan Mortgage Corporation (Freddie Mac) forced its stock to drop as regulators stepped in. The move caused the wider stock market to fall as investors feared market repercussions.

As government-sponsored enterprises, these giant lenders contain an inherent conflict: Both have a mandate to make mortgages affordable to low-income and minority citizens; but as two companies in the Fortune 500 Top 75, they also must maximize profits for shareholders.

The Freddie shakeup should renew attention to the government privileges both Freddie and Fannie enjoy. They don't have to pay state and local taxes. And their bonds carry triple-A ratings, even though they're backed by only a symbolic line of credit with the US Treasury. Federal Reserve Chairman Alan Greenspan thinks some investors may be unaware of that last point.

Further, the Bush administration says Fannie and Freddie's support for low-income housing is "inadequate." Indeed, one study found that in 2000 they bought smaller percentages of the conventional mortgages made in minority and low-income areas than they did in middle-income, mostly white areas. If banks did this, says the American Enterprise Institute's Peter Wallison, it would be illegal.

Under pressure from Congress, Fannie and Freddie have begun to register their common stock with the Securities and Exchange Commission and file quarterly and annual statements. But their remaining privileges still give them an edge over commercial banks, which are understandably unhappy about competing on such an obviously uneven playing field.

Congress needs to take a closer look at the privileges afforded these giants - privileges they clearly no longer need - and seek less risky ways to help low-income people buy homes.

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