FANNIE MAE and FREDDIE MAC

FANNIE MAE, FREDDIE MAC AND CORPORATE WELFARE

Fannie Mae and Freddie Mac have been problematic for some time. Below are links to our activities with respect to these organizations.


Information on Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac were created by Congress to "provide funding to mortgage lenders by purchasing their mortgages and then holding them or selling them to investors in the form of securities that they guarantee." These companies are also known as Government Sponsored Enterprises, or GSEs.

Federal Reserve Board Chairman Alan Greenspan noted, in a letter to the Chairman of the House Financial Services Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises dated May 19, 2000, "(The GSEs) were each chartered with the purpose of smoothing out regional imbalances in mortgage supply and integrating regional mortgage markets into the national capital markets. Much to their credit, they succeeded in accomplishing this goal many years ago."

Chairman Greenspan also stated that: "The history of financial involvement in increasing home ownership is one of taking risks - of designing new financial instruments and financial products to make financial resources available so that more people can realize the goal of home ownership. Taking prudent risks in lending so that others may attain an objective is the essential role of a financial intermediary..."

We have long been concerned with the GSEs ability to act in the public interest. We have been cited in numerous newspaper articles, and made a statement on May 16, 1996 at the White House Conference on Corporate Citizenship. This concern has increased given the level of arrogance we see at these institutions. For example, in response to a mildly critical Congressionally mandated study, one GSE spokesman said:

"This is a case of policy wonks piling their own prejudices on top of faulty analysis, and if these digit heads could figure out a better way of delivering credit to millions of families with the use of private capital while paying the government billions of dollars in federal taxes then they can get a real job in Washington." Mr. David Jeffers, Spokesman for Fannie Mae.

We also note that these entities have become increasingly complex. Fannie Mae recently announced it had made an error of more than $1 billion in its last quarterly earnings release.

  • We also note that these entities have become increasingly complex. Fannie Mae recently announced it had made an error of more than $1 billion in its last quarterly earnings release.
  • Freddie Mac announced that it, too, had erroneously reported past earnings: "Though it originally reported a profit of $837 million for the first quarter of 2001, Freddie actually lost $111 million during that period. For five of eight fiscal quarters in 2001 and 2002, Freddie (Mac) overstated income."
  • In essence, they lied.
  • Top executives at these organizations had an incentive to lie because "bonuses at Freddie Mac and Fannie Mae were based, in part, on financial performance."
  • These incidents make real our concerns. (For more information, see links above. Also see: http://www.washingtonpost.com/wp-dyn/business/specials/freddiemac/)

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Risks to taxpayers

We have long been concerned with the ability of mortgage funding giants Fannie Mae and Freddie Mac to act in the public interest:

On December 28, 1995, we suggested, in a Washington Post article titled Fannie Mae to Build Up Charity Unit, that Fannie Mae increased charitable contributions in response to criticism that it had not done enough for the community in the past. We added that the charitable contribution was no substitute for paying local income taxes. Further, while we expressed optimism concerning the ultimate impact of their efforts, we did not think their efforts would continue without public pressure.

On May 6, 1996, we suggested, in a Washington Post article titled This Foundation Director Says Charity Begins at Homes, that the Fannie Mae Foundation be directed to help with specific social issues, like issuing bonds to finance the renovation of D.C. public school buildings. We continue to believe the mission of the Foundation and of the GSE's should be revised.

On May 30, 1996, we suggested, in a Washington Post article titled CBO Faults Subsidies for 2 Finance Firms, that "their (the GSE's) primary mission has been completed and completed successfully." We suggested Congress impose a new and different mission, which might involve directing mortgage money to lower-income parts of the District and specifically addressing the problem of housing the homeless in the United States.

Part of our concern with Fannie and Freddie has been the level of complexity. Freddie Mac announced that it had significantly understated past earnings. Fannie Mae announced it had "made an error of more than $1 billion in a quarterly earnings release." One newspaper reported that "N. Gregory Mankiw, Chairman of the Council of Economic Advisers, told a group of state bank supervisors that the companies are so large and complex that it is hard even for the companies themselves to keep track of their own situations." The risk of a catastropic failure at Freddie or Fannie causing a meltdown of the U.S. mortgage market may be growing.

"The companies borrow money at reduced interest rates. Combined with another group of 'government sponsored enterprises,' the Federal Home Loan Banks, they had debts of $2.2 trillion at the end of 2002, approaching the privately held national debt of $3.2 trillion."

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

What They Say

According to their web site,

"Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. We do not lend money directly to home buyers. Instead, we work with lenders to make sure they don't run out of mortgage funds, so more people can achieve the dream of homeownership."

Fannie Mae is "the country's second largest corporation, in terms of assets, and the nation's largest source of financing for home mortgages. We are one of the largest financial services corporations in the world."

"Fannie Mae stock (FNM) is actively traded on the New York Stock Exchange and other exchanges and is part of the Standard & Poor's 500 Composite Stock Price Index.

In 1938, the Federal government established Fannie Mae to expand the flow of mortgage money by creating a secondary market. Fannie Mae was authorized to buy Federal Housing Administration (FHA)-insured mortgages, thereby replenishing the supply of lendable money.

"The companies borrow money at reduced interest rates. Combined with another group of 'government sponsored enterprises,' the Federal Home Loan Banks, they had debts of $2.2 trillion at the end of 2002, approaching the privately held national debt of $3.2 trillion."

In 1968, Fannie Mae became a private company operating with private capital on a self-sustaining basis. Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans."

According to their web site, "Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. By doing so, we ultimately help homeowners and renters get lower housing costs and better access to home financing."

The Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, chaired by Rep Richard H. Baker, holds oversight hearings on the Federal National Mortgage Corporation (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The committee: "..watches over the U.S. capital markets, securities and insurance industries and government-sponsored enterprises, such as Fannie Mae and Freddie Mac. It oversees the Securities and Exchange Commission as well as the self-regulatory organizations that police the securities markets."

According to the Committee "The hearings explore the potential risks posed by the enterprises to the taxpayers through their implied Government guarantee. Representatives from Fannie Mae, Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) comment on reports produced by GAO, CBO, HUD, and Treasury as mandated by section 1355 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992."

The popular perception is that Fannie and Freddie have greatly increased home mortgage opportunities for Americans in general and for minority and low-to-moderate income Americans in particular.

Homehownership statistics suggest otherwise.

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Homeownership Rates

Homeownership rates for the majority of Americans have not increased greatly under Fannie Mae and Freddie Mac. In the first quarter of 1965, before Fannie Mae was partially separated from the federal government, 62.9 percent of all American homes were owned by occupants.

By the first quarter of 1993, this statistic had risen to only 64.2%. In the first quarter of 1996, the overall homeownership rate was 65.1%. By first quarter 2003, the rate was 68.0%.

For Blacks and other minorities, the story is the same: home ownership rates have increased, but minimally. Minorities owned and occupied 38.4% of their homes in 1960 and 43.4% in 1993. By 2003, Black homeownership rates were 48%.

We cannot determine what part of the increase in homeownership is a direct result of Freddie and Fannie. Much of the increase has to do with general economic trends, such as higher salaries, and industry specific factors, like competition among financial institutions.

A report on Fannie Mae and Freddie Mac written by the Congressional Budget Office showed that the increase in home ownership has been purchased at great cost.

So, despite having paid billions in government subsidized profits to Fannie Mae shareholders, home ownership rates in the U.S. have increased, but increased slightly.

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Questions about Homeownerhip

How is it that homeownership rates have not increased significantly given the mission and assistance provided by Fannie Mae and Freddie Mac, and given the billions in government-subsidized profits paid to date to shareholders of Fannie and Freddie stock?

Since Freddie and Fannie claim that any change in GSE status will increase the cost of homeownership for all Americans, shouldn't they be held responsible for not more significantly increasing these homeownership rates?

Minority homeownership rates have fallen from their peak 1980 level. Aren't Freddie Mac and Fannie Mae charged with making home mortgage credit more broadly available?

Aren't these statistics an indication that they have failed in this part of their mission, given the high percentage of mortgage loans originated in the U.S. under Freddie/Fannie guidelines and given the specific mandate under which these organization operate and use to justify receiving government subsidies?

Given that Freddie Mac was found by the EEOC to be discriminating against Black employees, can we expect Freddie to fairly distribute housing credit to African Americans?

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Proposals for "Reform"

Proposals to have Fannie Mae and Freddie Mac play an increased role in financing the Nation's infrastructure ring hollow.

In a June 21, 1996 Washington Post editorial page arcticle, Mr. Charles Hoar and Mr. Peter Lewis, a law professor and an investment banker respectively, suggested that Fannie Mae invest 20 percent of its investment portfolio in municipal securities. The municipal finance markets are notoriously inefficient. Financing decisions in these markets have been shown, by the U.S. Securities and Exchange Commission, to be subject to political pressure. The major beneficiaries from this proposal would be investment bankers, already well off after years of increased financial market activity.

Having Fannie and Freddie devote a portion of their investment portfolio to the purchase of municipal securities would not be appropriate. Giving them a tax credit for doing so would also be inappropriate. Rather, we seek ways to have Fannie and Freddie better do what they were chartered to do - to cost effectively help all Americans enjoy the benefits of home ownership.

This ongoing debate is about performance versus perception. This debate is also about improving the efficiency of these two huge, powerful and politically well-connected organizations. Locally, this debate is about whether or not one of these institutions, Fannie Mae, has the character to increase its commitment to the city in which it operates. This debate is not driven by the fact that these organizations have been financially successful, as some, including the Washington Post (in an editorial published on June 10, 1996) have argued.

On June 15, 2000, in testimony before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, I suggested that:

The GSE's be subject to a through "Social Audit." A Social Audit is an examination of the performance of an enterprise relative to certain social objectives. The GSE's are currently subject to a limited social audit: Central city and minority lending goals have been established and progress in meeting those goals is reviewed each year. Reports on GSE performance in meeting certain lending goals are then made public. I suggested, however, that the GSE's be subject to a more detailed and rigorous social audit covering all aspects of their operations.

The major benefits of a GSE social audit are:

  • Improved GSE accountability with respect to social and community investment activities;
  • Increased GSE social efficiency and effectiveness;
  • Increased ability to effectively monitor and manage GSE social performance;
  • GSE social achievements reported in an unbiased manner.

I also suggested:

That GSE's receive an annual credit rating from nationally recognized statistical rating organizations. Such an examination would significantly improve transparency by providing an independent and objective opinion concerning the GSE's financial condition.

That Congress consider designating the Federal Reserve Board the primary GSE financial institution regulator. The "Fed" will, one day, need to oversee the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. Recent advancements in financial and computer technology require the creation of such a strong central bank.

That the Executive Branch's role be limited.

In an interdependent financial world, with capital and information flows often determining the fate of nations, it is entirely appropriate to review the proper role and function of the GSE's. Given the speed with which capital market destabilization can occur, as shown after Freddie Mac's announcement that it had understated past earnings, a strong, unbiased, and politically independent GSE regulator can be an essential tool assisting Congress with its GSE oversight responsibilities. This increased scrutiny should include a full GSE mission review.

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Testimony Before the US House (click on title below to go to House Financial Services Committee website)

TESTIMONY BY WILLIAM MICHAEL CUNNINGHAM Before the HOUSE BANKING SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES AND GOVERNMENT SPONSORED ENTERPRISES. FOR RELEASE June 15, 2000 10am.

Thank you, Mr. Chairman, Representative Kanjorski, Members of the Subcommittee, for giving me the opportunity to testify on the supervision and regulation of government sponsored enterprises, or GSE's. Your bill, H.R. 3703, the Housing Finance Regulatory Improvement Act, comes at a critical time. The bill proposes a new regulatory structure for three government-sponsored enterprises (GSE's). Given the importance of this legislation, I am honored to have an opportunity to comment. It is appropriate to note, however, that my comments represent my own views and do not in any way represent the views of my employer, the Board of Pensions of the Evangelical Lutheran Church in America. Nor do my views represent opinions from the GSE's themselves or Wall Street. I come before this Committee as an unbiased, independent investment analyst.

I will divide my remarks into four parts: first, a general discussion on social investing; second, a description of the GSEs' role in social investing; and third, background information on my activities in both social investing and the secondary mortgage markets, and finally, my concerns with how the GSE's are currently fulfilling their public purpose mission. I'll end with my view on certain aspects of the Baker bill.

Social Investing

"Social investing" describes a style of investing combining a desire to maximize financial return with an attempt to maximize social good. Many believe social investing began with the Religious Society of Friends, better known as the Quakers. In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying or selling humans. Religious institutions have been at the forefront of social investing since.

In general, social investors favor:

  • Environmentally responsible corporate practices;
  • Corporate practices that support workforce diversity;
  • Corporate practices that increase product safety and quality.

According to a study Environmentally responsible corporate practices . released by the Social Investment Forum (SIF), a nonprofit professional association dedicated to promoting socially responsible investing, more than $2 trillion (US) is now invested in a socially responsible manner in the U.S. Social investments now account for about 13 percent of the estimated $16.3 trillion under professional management in the U.S.

Social Investing Strategies

Social investors use three basic strategies to maximize financial return and attempt to maximize social good. These strategies are outlined below.

SCREENING excludes certain securities from portfolios based on social and/or environmental criteria. For example, many socially responsible investors screen out tobacco company investments. Recently, CalSTRS (California State Teachers' Retirement System) announced the removal of more than $237 million in tobacco holdings from its investment, portfolio after 6 months of financial analysis and deliberations. This is an example of a social screen at work.

SHAREHOLDER ACTIVISM. Shareholder Activism efforts attempt to positively influence corporate behavior. These efforts include initiating conversations with corporate management, or dialoging, on issues of concern, and submitting and voting proxy resolutions. These activities are undertaken with the belief that social investors, working cooperatively, can steer management on a course that will improve financial performance over time and enhance the well being of the stockholders, customers, employees, vendors, and communities.

POSITIVE INVESTING involves making investments in activities and companies believed to have a high and positive social impact. Positive investing activities tend to target underserved communities. These efforts support activities designed to provide mortgage and small business credit to minority and low-income communities. It is in this area that Fannie and Freddie are most active.

According to their web sites:

"Freddie Mac is a stockholder-owned corporation chartered by Congress to increase the supply of money that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multifamily investors."

and

"Fannie Mae is a private, shareholder-owned company that works to make sure mortgage money is available for people in communities all across America. We do not lend money directly to home buyers. Instead, we work with lenders to make sure they don't run out of mortgage funds, so more people can achieve the dream of homeownership. Fannie Mae is the country's third largest corporation, in terms of assets, and the nation's largest provider of funds for home mortgages."

Clearly, these are positive investing activities. Carried out consistently and correctly, these activities have a high social impact.

Background: Socially responsible investing and the secondary mortgage markets.

Let me now speak about my efforts in both socially responsible investing and the secondary mortgage markets.

In a 1996 article in the Washington Post, I commented that "It seems their (Freddie and Fannie's) primary mission has been completed and completed successfully. Now its time to look for a different mission, which could include finding mortgage money for low income parts of the District and housing the homeless." Others have echoed this sentiment. FRB Chairman Greenspan noted, in a letter to the Chairman dated 5/19/2000, "(The GSE's) were each chartered with the purpose of smoothing out regional imbalances in mortgage supply and integrating regional mortgage markets into the national capital markets. Much to their credit, they succeeded in accomplishing this goal many years ago. It is time to assign a new mission to the GSE's. I have outlined some suggestions below.

As many who have come before this committee have noted, domestic housing finance markets are broad and well functioning. In looking for a new mission, I suggest the GSE's focus on investment opportunities in housing markets populated by minorities and women. These markets have been the beneficiaries of an unprecedented increase in financial market activity and asset values. Devoting even a small percentage of GSE mortgage financing activity to markets populated by persons of low to moderate income, minorities and women will help even the distribution of income and wealth, contribute to domestic political and economic stability, and earn a competitive return. It is my belief that investors, women, and minorities are all well served by these efforts. Further, I believe it is possible to create investments and portfolios that perform well financially and that address social concerns. I have uncovered many investment opportunities of this type. Let me describe one such investment opportunity.

I currently work for the Board of Pensions of the Evangelical Lutheran Church in America. There, I manage Social Purpose Investing and Customer Education efforts. The Board of Pensions was one of the first socially responsible investors of significant size in the United States.

Prior to joining the Board of Pensions of the ELCA in 1999, I served as CEO of Creative Investment Research, an independent investment research and management firm I founded in 1989. The firm specialized in socially responsible investing. My background in finance and investing led me to develop several socially responsible community investment products over the past 10 years. One of these was a set of mortgage-backed securities originated by financial institutions owned by minorities and women and serving areas of high social need. As noted in the American Banker Newspaper , I was the first investment advisor to create a mortgage-backed security composed entirely of loans from minority and women owned financial institutions. Working with G.E. Capital , I identified minority owned lenders willing to participate in the program, arranged G.E. Capital's participation as aggregator of the loans originated by these minority owned financial institutions, and worked to place the pools with a socially responsible institutional pension fund as an investment advisor.

Several times, I approached Fannie Mae and Freddie Mac to further develop these types of products. Unfortunately, at the time neither agency was interested or very helpful.

Social Investing Concerns: GSE's

Given their public purpose and mission, social investors have long believed Fannie and Freddie to be both positive investors and good corporate citizens. In the main and for the most part, they are. But, I have been troubled by certain aspects of GSE corporate behavior over the years. I am most deeply concerned with a recently issued report on GSE home mortgage lending to minorities. The report, issued by the U.S. Department of Housing and Urban Development, showed "the share of GSE mortgages going to minorities trailed the national average of 15.3 percent. Fannie Mae lent only 14 percent and Freddie Mac lent only 12.2 percent to minorities.

The disparity is even more pronounced in mortgages to black Americans. While the total market for mortgages to blacks is 5 percent, Fannie Mae only lent 3.2 percent and Freddie Mac lent only 3.0."

Both Freddie and Fannie dispute these numbers. I expect the debate concerning GSE performance in this area to be a lively one. However one views the statistics, I think we can all agree that much remains to be done in this sector of the home mortgage market. By reducing the flow of mortgages to minorities, GSE's have ignored profitable domestic lending opportunities. This behavior reduces GSE income and stifles the flow of mortgage credit. This, I think we all agree, is contrary to their public mission and is, in general, a bad thing.

We have seen other financial institutions repeat this behavior. On October 22, 1998, Freddie Mac Board member and economist Henry Kaufman, speaking of the Russian financial crisis, noted in the Washington Post that:

"All the problems pervading Wall Street just can't be blamed on outside forces..Institutions have incorrectly assessed risk. If they had done their due diligence, a lot of this (the Russian financial crisis) mess would not have happened."

Likewise, all of the uncertainty Freddie and Fannie now face cannot be blamed on outside forces, like Congress or HUD, or incorrectly interpreted statistics. The GSE's have incorrectly assessed home mortgage loan risk in minority markets. We agree with Federal Reserve Board Chairman Alan Greenspan when he said:

"The history of financial involvement in increasing home ownership is one of taking risks - of designing new financial instruments and financial products to make financial resources available so that more people can realize the goal of home ownership. Taking prudent risks in lending so that others may attain an objective is the essential role of a financial intermediary..."

It is certainly appropriate for Congress to review both GSE financial performance and their public mission performance. We suggest Congress refocus Fannie and Freddie efforts. We would like to see the GSE's become much more active in the affordable housing area. Needs in this area are great. According to HUD,

The housing affordability crisis facing very-low-income renters continues to worsen as 5.4 million renter households, a record high, are experiencing worst case needs for housing assistance.

The number of working families with worst case housing needs has increased sharply since 1991.

The stock of rental units that are affordable to extremely low-income renters has continued to shrink, with even sharper decreases in units that are both affordable and available to these renters.

Worst case needs have become more concentrated among families with extremely low incomes.

Worst case needs have increased most quickly in minority households, particularly among working families with children.

Very-low-income families remain most likely to face worst case problems when they live in the suburbs.

Other Concerns

Other events have caused concern. On September 3, 1998, the Equal Employment Opportunity Commission concluded there was widespread discrimination against black employees at Freddie Mac. Acting on a complaint filed by Tony Morgan, a person of color once employed in a professional capacity on Capital Hill and Freddie Mac's former director of corporate relations, the EEOC said the Congressionally chartered, publicly held company created a ``hostile work environment.'' This "hostile environment" may have impacted Freddie's ability and desire to make loans to African Americans. One way this is likely to manifest itself is in the evaluation of risk. The perceived riskiness of loans to African Americans is likely to be overstated.

In addition, I have been discouraged by certain comments made by executives at both Freddie and Fannie when questioned by members of Congress. It is critically important that management at these agencies understand Congress has a legitimate role in reviewing their activities, both from the standpoint of financial safety and soundness and with respect to the public mission the organizations were chartered to carry out.

I note that the Chairman has been examining GSE activities since at least 1996. Only recently I have seen a change in GSE attitude.

H.R. 3703

Mr. Chairman, I would now like to turn to your legislative proposal.

Promoting Private Market Discipline

I support repealing the GSEs' conditional line of credit with the Treasury. I agree with Treasury Under Secretary Gary Gensler when he stated, in testimony on March 22, 2000 before this Committee, that: "Repeal of the line of credit would be consistent with the congressional requirement that all GSE securities carry a disclaimer that they are not obligations of the U.S. government."

Increasing Transparency

I support provisions in the bill that increase transparency. I also support provisions in the bill that require the GSE's to receive an annual credit rating from nationally recognized statistical rating organizations. Such an examination would significantly improve transparency by providing an independent and objective opinion concerning the GSE's financial condition.

I also suggest that the GSE's be subject to a through "Social Audit." A Social Audit is an examination of the performance of an enterprise relative to certain social objectives. The GSE's are currently subject to a limited social audit: Central city and minority lending goals have been established and progress in meeting those goals is reviewed each year. Reports on GSE performance in meeting certain lending goals are then made public. I am suggesting, however, that the GSE's be subject to a more detailed and rigorous social audit covering all aspects of their operations.

For the GSE's the major benefits of a social audit are:

Improved accountability with respect to social and community investment activities.

Increased social efficiency and effectiveness.

Ability to effectively monitor and steer social performance.

Social achievements reported in an unbiased manner.

Promoting Market Competition

I support provisions in the Bill to preserve market competition.

Structural issues

I support the creation of a fully independent GSE regulator. I further suggest this regulator not part of the executive branch. As an alternative, the Chairman may wish to consider designating the Federal Reserve Board the primary GSE financial institution regulator.

I believe the Fed will, one day, need to oversee the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. Recent advancements in financial and computer technology require the creation of such a strong central bank.

I strongly suggest that the Executive Branch's role be limited. Recent incidents have reinforced my fear that political interference may limit Executive branch regulatory effectiveness and objectivity. I refer the committee to one recent incident:

"A top federal bank regulator, responding to concerns over possible political interference in bank examinations, has ordered his staff to quit fielding a list of friendly bankers to support a controversial fair lending law.

John D. Hawke Jr., acting Comptroller of the Currency, told his staff in a memo issued Friday that bank examinations must be 'kept completely free from even the appearance of being influenced by political considerations.' The comptroller, an arm of the Treasury Department, regulates 2,600 national banks."

We have observed this type of inappropriate behavior before, preceding the S&L Crisis of the 1980's, and more recently, with the Community Development Financial Institution program, a financial institution program administered by Treasury. According to the House Banking Committee:

"$37 Million Clinton Inner-City Loan Fund in Disarray and subject to Political Cronyism. 1 in 3 Grants To First Lady's Favorite.

A $37 million Clinton Administration campaign centerpiece designed to overcome perceived inequities in bank lending to poor and inner-city clients appears to be in disarray, is without adequate standards for making grants, and has at least the appearance of conflicts of interest that 'raises questions concerning the fairness of the system,' a senior House Banking Committee member said today."

In this case, critical federal assistance and funding was determined to have been distributed, in part, based on political ties and not on efficiency, market requirements, performance or need. Given this, I believe making an executive branch agency the chief GSE institution regulator may have quite negative consequences. The Federal Reserve System, an independent body, is not subject to and has not been shown to engage in this type of politically biased regulatory interference.

Conclusion

In an interdependent financial world, with capital and information flows often determining the short term fate of nations, it is entirely appropriate for this committee to review the proper role and function of the GSE's. Given the speed with which capital market destabilization can occur, as shown during the Long Term Capital Management (LTCM) incident, a strong, unbiased, and politically independent GSE regulator can be an essential tool assisting Congress with its GSE oversight responsibilities.

This Committee has done the country a great service by focusing on the impact GSE's have on the long term stability of the U.S. financial system. I applaud the Committee for doing so in a balanced, thoughtful manner..

Contact Creative Investment Research

If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

Make an Appointment

Final Questions

  • Do Freddie and Fannie receive any other special benefits from their GSE status not explicitly recognized so far. What rates do employees of these companies pay when traveling on business - government or corporate? If they pay the government rate for hotels, airfare and other business travel expenses, aren't we further subsidizing private shareholder gains using public funds?
  • What is the role of the Foundations sponsored by Fannie Mae and Freddie Mac?
  • What, exactly, do the Foundations do?
  • How much do the Foundations spend, on an annual basis, on print and electronic advertising?
  • Do these advertising expenditures have a direct, measurable impact?
  • If so, how, exactly, do these expenditures help these institutions carry out their congressionally mandated missions?
  • Does the Federal government subsidize these expenditures twice - once, given the reduced borrowing costs Fannie and Freddie receive and again through tax exemptions granted to foundations?
  • In addition, news articles have noted that:

    "EEOC finds discrimination at Freddie Mac

    (Washington, D.C., Sept. 3, 1998) -- The Equal Employment Opportunity Commission has concluded there is widespread discrimination against black employees by Freddie Mac, a federally chartered mortgage underwriting company.

    Acting on a complaint filed by Freddie Mac's former director of corporate relations, the EEOC issued a finding recently that said the publicly held company has created a 'hostile work environment' and urged swift corrective action to head off another lawsuit.

    The EEOC filed suit against Freddie Mac last year, but a federal judge dismissed the suit after finding that the company had taken sufficient remedial action.

    But EEOC lawyers said other employees have come forward since then with evidence of a pattern of discrimination against black employees."

    Contact Creative Investment Research

    If you have any questions about Fannie Mae, Freddie Mac or other social investing topics, contact us at (202) 455-0430. Contact us to schedule an initial consultation at a time that is convenient for you.

    Make an Appointment

    Testimonial

    William Cunningham is a dynamic individual who has a deep understanding of the Capital Markets and is able to integrate the human component into investment policies and practices.

    David Carrington

    Board Member at St. Simon's Shelter

    Bill Cunningham is one of the original SRI investment advisers. He is an expert in the field of socially responsible investing.

    Don Wiss

    President of BondCalc (Debt and Actuarial Pricing Programmer)

    I strongly recommend others interested in launching a crowdfunding campaign to schedule a one-on-one appointment or to invite Bill to speak to their group about crowdfunding!!

    Dr. Jonathan A. Jenkins, DBA, CSSBB, MSQA

    Social Entrepreneur