DEBORAH AMOS, host:
The Bush administration and Congress have been arguing for some time that a stronger regulator could reduce the threat Fannie and Freddie pose for taxpayers, and Secretary Henry Paulson in a speech in New York yesterday says that's a top priority.
Mr. HENRY PAULSON (U.S. Secretary of Treasury): Congress is very near completing its work to create that regulator and it must do so quickly.
AMOS: The proposal to aid Fannie and Freddie and create a new regulator are part of the housing rescue bill Congress is expected to act on this week. NPR's John Ydstie reports.
JOHN YDSTIE: Currently Fannie Mae and Freddie Mac are regulated by the Office of Federal Housing Enterprise Oversight. It's embedded in the Department of Housing and Urban Development. OFHEO, as it's called, depends on Congress for its funding. The housing rescue bill would change all that. It calls for a new regulator in an independent, stand-alone agency. It would be funded by fees paid by Fannie and Freddie and not depend on Congress for an appropriation. The idea is that a regulator with a stronger mandate and greater independence could force Fannie and Freddie to operate more safely.
But Robert Litan, an economist at the Brookings Institution, is skeptical.
Mr. ROBERT LITAN (Brookings Institution): I think the change is largely cosmetic.
YDSTIE: Litan doubts Congress will keep from meddling. After all, through generous political giving and effective lobbying, Fannie and Freddie have managed to fend off attempts to force them to boost the capital they hold, their buffer against losses. And, says Litan, the lobbying has been effective because housing is a huge issue.
Mr. LITAN: Fannie and Freddie and the missions they pursue are so highly political - housing is one of the number domestic agenda items. So that in practice the regulator is still at the end of the day going to have to answer to Congress.
YDSTIE: Harvard economist Ken Rogoff says we're past the point where a new regulator could have much impact.
Mr. KEN ROGOFF (Harvard University): Of course it's better to have the regulator be stronger. It would've been even better if they did that ten years ago. It's really a little late to try to rescue it that way.
YDSTIE: And in any case, says Rogoff, regulation is problematic in this age when the resources of independent companies are so huge and markets and financial instruments are so complex.
Mr. ROGOFF: It's very, very hard for regulators to compete in this rocket science industry. The only thing that really works is for the shareholders and the bondholders to lose their money when these agencies go under. That's the key to self-policing, that people investing in the companies think they're going to lose their money.
YDSTIE: Rogoff argues the best course is to drive Fannie and Freddie share prices to zero, nationalize them, shrink them, and ultimately turn their functions over to the private market without any implicit or explicit government guarantees.
Professor ANTHONY SANDERS (Arizona State University): I'm not sure what sense that makes.
YDSTIE: That's Anthony Sanders, a professor of finance at Arizona State University. He says Fannie and Freddie have a political mission. Their government charters task them to provide affordable mortgages for middle-class Americans; in the words of the Bush administration, to build an ownership society.
Prof. SANDERS: To suddenly take away that mission, that's a major policy change.
YDSTIE: And, Sanders says, given the horrible mess private financial companies have made in the subprime mortgage market, there are real questions whether they could keep the U.S. mortgage market functioning without institutions like Fannie Mae and Freddie Mac.
Prof. SANDERS: Apparently with the subprime and alt-A markets, they didn't do a very good job with securitization. In fact, it looks like they completely dropped the ball on it. But secondly, do you think Citibank or Wells or any of those banks are going to provide the guarantee? And the answer is no.
YDSTIE: Without the government guarantee backing mortgages, Sanders says, investors would be much less interested in providing funding for American homebuyers and mortgage interest rates could rise a full percentage point or more. That could price many people out of the housing market and further undercut the housing industry.
John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
