Fannie and Freddie Agree to More Disclosure

Recently, there has been an intense debate on the appropriate policies to regulate Fannie Mae and Freddie Mac. In their well-written article in the Wall Street Journal, John D. McKinnon and Patrick Barta point out that the two companies were a duopoly "created decades ago as government agencies to increase the efficiency of the U.S. mortgage market." Later they were privatized, but did not sacrifice their profitable ties to the government, such as "access to lines of credit at the Treasury and exemption from SEC oversight." Of course, these benefits were unavailable to their private competitors. In the eyes of many borrowers and investors, these friendly arrangements implied that they were quasi-government agencies.

McKinnon and Barta review the rather tortured path that led Fannie Mae and Freddie Mac to "agree to scrutiny by Federal Regulators." (They note that "scrutiny" is not the same thing as "full-scale securities regulation." Under the agreement, "the Securities and Exchange Commission will oversee only the government-sponsored mortgage giant's existing common stock." That limitation means that they "have sidestepped-for now at least-full-scale securities regulation." While the firms provide financial information to their investors, they now must also submit their periodic financial statements to the SEC. Nonetheless, it is important to recognize that "the deal excludes direct government oversight of the debt and mortgage-backed securities the companies issue on Wall Street."

In a separate editorial (July 15, 2002), the editors of the Wall Street Journal have pointed out that the arrangement does not require Fannie and Freddie to submit the same detailed information to investors in their mortgage-backed securities that is required from competing issuers of mortgage-backed securities. Fannie and Freddie provide only generic information and avoid giving such information as the prepayment rates on the pooled mortgages. Referencing the agreement to submit to greater federal scrutiny, the editorial sends "congratulations to Fannie and Freddie for seeing the light, and we hope there will be more light to come, in particular a voluntary decision to disclose the same information on mortgage-backed securities that their competitors do." However, it is not over yet. The agreement requires a government study of the adequacy of the disclosure of the contents of mortgage-backed securities.

Fannie and Freddie have hailed the agreement in their press releases: "...Fannie Mae, the nation's source of financing for home mortgages, today announced that the company will voluntarily register its stock with the Securities and Exchange Commission (SEC) in 2003, which will permanently require the company to file its periodic financial disclosures with... the SEC. Fannie Mae's debt and mortgage-backed securities (MBS) that support the company's secondary market activities will not be subject to the registration process, but investors in those securities will receive benefits from the mandatory corporate disclosures regarding Fannie Mae's common stock."

"Freddie Mac ... today announced another step in demonstrating its unparalleled financial transparency by initiating ongoing Securities and Exchange Commission (SEC) of its financial disclosures under the same standards used for other publicly traded companies."