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Scandal's Effect on Mortgage Rates

Fannie Mae reduced purchases could spell higher rates

September 30, 2004


Fannie Mae's accounting problems have touched off concerns about a spike in mortgage rates.

The situation is being closely watched by financial analysts, mortgage bankers and industry watchers. Many assume that if Fannie slows its purchases of home mortgages interest rates will rise.

But few, at least for now, see rates rising so much as to slow home sales or add major costs to the purchase of a home.

"The cost of mortgages down at the retail level where human beings get financing is a long way and disconnected from the accounting issues that Fannie Mae is being required to address," Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage information based in New Jersey, said in an interview.

If rates do rise a couple of basis points those costs will be passed on to consumers, and the impact will not be that great, he said.

"It's nothing to get too worried about," Gumbinger said. "The effect on the consumers will be pretty limited, if there is any at all."

In a research report to investors, equity analyst Jonathan Gray of Sanford C. Bernstein & Co. in New York said that if Fannie starts to sell of portions of its large mortgage portfolio "we would expect mortgage rates to rise by perhaps 25 (to) 40 basis points," according to a written copy of the report the firm provided to MortgageDaily.com.

That could actually be good news for Fannie's stockholders, Gray said.

"While (Fannie) would have a smaller volume of loans on its balance sheet, it would have a much wider profit margin on those assets and...higher capital level," he said.

In a blistering report, the Office of Federal Housing Enterprise Oversight, (OFHEO) the regulator that oversees Fannie, detailed accounting and management problems at the nation's largest owner of home mortgages. Fannie has agreed to keep 30 percent more capital on its balance sheets, a number that will equate to billions of dollars.

The Securities and Exchange Commission has also launched an informal probe.

Bert Ely, who operates a Washington D.C.-area bank consulting firm, said he believes that even with Fannie's problems talk of a big jump in interest rates has been "overstated."

"I'm skeptical" of any major rate increase, Ely said in an interview. "Rates...might go up 5 to 15 (basis) points, maybe a 10th of a percent. There's a lot of noise out there but I question whether homeowners will really see any effect."

But the scandals could lead to talk of privatizing Fannie and the smaller Freddie Mac, which are both known as Government Sponsored Enterprises, or GSEs. They are privately owned now, but operate under federal government charters and oversight.

In a newspaper opinion piece Jonathan L. Kempner, president and CEO of the Mortgage Bankers Association, said explicitly that "privatization is not the answer" for the GSEs.

"Congress should pass legislation that provides the proper oversight of the GSEs," Kempner said. "While recent events prove that stronger regulation of the GSEs is necessary, privatizing them could lead to disruptions in the market and higher costs for consumers."

A stronger regulator "should ensure that the GSEs maintain their original mission of providing liquidity so mortgage bankers can continue offering products that meet consumer needs at the lowest possible interest rates," he said.

Meanwhile, Moody's Investors Service is reviewing and may downgrade Fannie's 'A-' Bank Financial Strength Rating.

The rating "reflects the uncertainty surrounding the ongoing OFHEO investigation and informal SEC inquiry regarding accounting and internal control matters at the GSE."

"The uncertainty arising from these events could result in greater political and financial challenges for Fannie Mae, particularly if the GSE is required to restate its financial results," Moody's said in a statement.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]
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