ICBA - Publications - Reading Between the Lines

Reading Between the Lines

DECEMBER 5, 2003


Banker Update: Reading Between the Lines

We recognize that what we attempt here is more art than science. But nevertheless we feel it is worth a try since earlier this week U.S. Treasury secretary John Snow kept up the political pressure (as well as downward pressure on Fannie Mae's stock) by meeting with House Financial Committee chairman Michael Oxley (R-OH) to discuss GSE reform. As you know, the Treasury supports bringing the Federal Home Loan Banks, along with Fannie and Freddie, under Treasury supervision and regulation.

Unfortunately, based on press coverage of the meeting, the sensitive issue of Fannie and Freddie's individual $2.25 billion line of credit with Treasury was discussed, as was regulatory restructuring.

The Dow Jones press report on the meeting also noted that "legislation creating a new regulator under the Treasury became mired in political gridlock in the House earlier this year with Treasury officials criticizing Oxley's bill as weak."

But this ICBA Banker Update goes to another administration statement on November 6 by Dr. N. Gregory Mankiw, the distinguished chairman of the White House's Council of Economic Advisors. Dr. Mankiw had chosen the subject of GSE restructuring as his speech topic.

In making the administration's case, Dr. Mankiw sought to put to rest the notion that any change in GSE regulation or in Fannie and Freddie's status could adversely impact the supply of funds for mortgages. He explicitly stated that "all indications are that if the housing GSEs were to lose some of their implicit subsidy, private financial institutions would eagerly step in. For example, Washington Mutual and Bank of America currently serve as reliable intermediaries between investors and the originators of mortgages not eligible for GSE purchase." (emphasis added)

In other words, never fear-if Fannie and Freddie lose market share, Washington Mutual and Bank of America would be there to pick up the pieces. Would these now full service institutions of almost national reach also attempt to cherry pick the prime customers of smaller institutions from whom they bought mortgages? But of course-that is the name of the game. Fannie and Freddie don't compete for the checking accounts and other services provided by community banks.

And who's on point, politically, in getting Fannie, Freddie and the Federal Home Loan Banks under Treasury regulation? Washington Mutual, certainly. It makes sense for them-and they carry enormous political clout in the Financial Services Roundtable, let alone the ACB. The White House has given its favorable nod to WAMU's taking of market share from Fannie and Freddie. The Treasury as a regulator could ensure this is the end result.

It appears that these issues will be high on next year's congressional agenda.