WASHINGTON (AP) — Amid accounting troubles at Freddie Mac, President Bush asked Congress on Friday to approve a $7.5 million boost for supervising and investigating the mortgage giant and its sister agency Fannie Mae.
The move came two days after Treasury Secretary John Snow asked lawmakers for a stronger government hand over the two companies through creation of a new regulatory agency in his department.
The new regulator would replace the Office of Federal Housing Enterprise Oversight, the small agency within the Department of Housing and Urban Development that now oversees government-sponsored yet publicly traded Fannie Mae and Freddie Mac.
In a budget letter sent Friday to Congress, the White House said it expects the money in OFHEO's budget — now a requested $39.9 million — to be transferred to the new agency after Congress enacts the administration proposal to revamp the regulatory regime.
OFHEO is funded by levies on Freddie Mac and the larger Fannie Mae, the two biggest players in the multitrillion-dollar home mortgage market, but Congress must approve its budget.
Agency supporters say it is chronically underfunded. Critics — including a number of lawmakers — maintain that it is weak and ineffective and was too slow to investigate the problems at Freddie Mac.
The $7.5 million increase over the original budget request, for the fiscal year beginning Oct. 1, is close to what OFHEO recently asked for from White House budget officials.
"We appreciate the administration's support for additional funds," OFHEO spokeswoman Corinne Russell said.
The $7.5 million requested by the White House is comprised of $4.5 million for special reviews of Fannie Mae ($3 million) and Freddie Mac ($1.5 million), and $3 million for more routine regulatory and oversight activities. The accounting debacle at Freddie Mac has brought the ouster of two chief executives since early June and investigations by the Justice Department and the Securities and Exchange Commission, in addition to OFHEO's ongoing inquiry into the $40 billion-a-year company. Freddie Mac has disclosed that accounting errors and manipulations of internal accounts resulted in its underreporting earnings by $1.5 billion to $4.5 billion in the 2000-2002 period.
Fannie Mae in mid-July reported a 25 percent drop in its second-quarter earnings caused by changes in the value of contracts used to hedge against interest-rate swings, even though its business expanded significantly. The company also said it will be less profitable in the second half of the year.
Critics say Fannie Mae does not adequately hedge against rising interest rates.
Fannie Mae's chairman and chief executive officer, Franklin Raines, said recently that the company has not engaged in any questionable transactions and has unfairly suffered "collateral damage" from the accounting failure and management shake-up at Freddie Mac.
Congress, which created the two companies and has traditionally resisted moves to tighten oversight of them, now appears largely receptive to the administration's proposal in the aftermath of Freddie Mac's accounting and management travails. The companies are big contributors to lawmakers of both political parties.
Created to pump money into the home mortgage market, the two have grown explosively in recent years as they've snapped up home loans from banks and bundled them into securities for sale on Wall Street. They have a peculiar status: They are not directly guaranteed by the government, but they can borrow directly from the Treasury. That makes their borrowing rates lower.