Fannie Mae and Freddie Mac Need More Regulation

If this bill ever passes the full Senate it should help reign in some of the market distorting actions on the part of Fannie Mae and Freddie Mac (GSEs). For example, the implied US Government guarantee of GSE issued debt results in lower mortgage rates than would be expected. If the legislation restricts how much the GSE’s can participate, then the commercial banks, which have lower than AAA ratings, will be forced to reduce the amount of underwriting they do and increase the interest rate that they charge. For the record, President Bush is in favor of the legislation.


“WASHINGTON, July 28 (Reuters) - A U.S. Senate panel on Thursday approved a bill to overhaul supervision of mortgage finance giants Fannie Mae and Freddie Mac that would require cuts in the companies' $1.5 trillion investment portfolios.

The Senate Banking Committee approved the bill from its chairman, Alabama Republican Sen. Richard Shelby. The legislation must now be considered by the full U.S. Senate, but many analysts and lobbyists questioned whether that would happen before the end of the year.”

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