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Market Savvy | SAVVY CONFIDENTIAL / A Briefing for
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Fannie and Freddie Hit By Greenspan

May 24, 2000|Washington Post

Shares of mortgage giants Fannie Mae and Freddie Mac slumped Tuesday as Federal Reserve Chairman Alan Greenspan appeared to give more ammunition to opponents of the government subsidies the firms enjoy.

The federal subsidies lower mortgage costs for home buyers, but at the price of increasing consumers' taxes or reducing their wealth in other ways, Greenspan told Congress.

Greenspan said lawmakers should periodically review these subsidies--which include lower borrowing costs and tax exemptions in all worth an estimated $6 billion a year--because they have "important consequences for the structure and efficiency of the financial markets."

His comments were in a letter to Rep. Richard H. Baker (R-La.), who has been holding hearings on the two mortgage titans.

Fannie Mae shares (FNM) slid $3.13 to $57.13, and Freddie Mac (FRE) dropped $2.81 to $42.94.

Fannie Mae and Freddie Mac are "government-sponsored enterprises" (GSEs) created by Congress to buy home loans from banks and other lenders to make mortgage money plentiful.

The companies, which are the largest suppliers of mortgage money in the country, are stockholder-owned, but because of their ties to the federal government, they are able to borrow at rates only slightly above government bonds.

"Subsidies accorded to government-sponsored enterprises are, of necessity, at the expense of other federal or private-sector initiatives and hence are ultimately financed by households, either through taxes or through the reduced accumulation of wealth," Greenspan said.

Greenspan wrote the letter in response to Baker's request that the Fed assess the potential risk that Fannie Mae, Freddie Mac and another group of GSEs, the 12 Federal Home Loan Banks, pose to the economy.

Baker has been exploring the issue of whether some of the ties the institutions have to the government should be cut and their oversight by regulators strengthened. The letter is the most expansive Greenspan has been on the GSEs and their effect on the economy.

Fannie Mae spokesman David Jeffers said in a prepared statement that Greenspan's "comments are nothing new or surprising," given that they are similar to comments he has made about federal deposit insurance and other government programs that benefit financial institutions.

Still, investors are worried that any loss of subsidies could hurt the companies' long-term earnings prospects.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Worries Dog Mortgage Titans

Shares of mortgage giants Fannie Mae and Freddie Mac have been sliding since early 1999, in part on fears that they may lose government subsidies that lower their borrowing costs and tax bills. Monthly closes and latest on the New York Stock Exchange:

Fannie Mae, Tuesday: $57.13

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Freddie Mac, Tuesday: $42.94

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Source: Bloomberg News

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