By: Ronald D. Struck
February 2001
SPILT FREDDIE MAC?
Mr. Lewis Ranieri, CEO of Hyperion Capital
and ex vice-chairman of
Salomon Brothers, has proposed that Freddie Mae be split into two
companies so one could focus on areas not permitted by its charter. I worked with Lew Ranieri years ago and have a great deal of respect for him, but I am very much
opposed to his idea. Why?
Because, the
new company would be an "almost" quasi-agency of the
government and in a few years, we'll have a nationalized commercial
mortgage market.
I was with Freddie Mac from 1972 to
1977 during its start-up years. Preston
Martin was chairman (also chairman of the Federal Home Loan Bank
Board) and
Thomas Bomar was the CEO (Freddie Mac's first).
I clearly
remember the reasoning for creating Freddie Mac articulated by Mr. Martin and Mr. Bomar
at the time, which also reflected the
desires of a majority of Freddie Mac’s sponsors in Congress.
Freddie Mac was never to be a giant
company. It would focus on improving the operating structure of
the thrift industry's secondary market for residential mortgage and
transfer these improvements back to the private sector.
When Freddie Mac was created, mortgage bankers had
developed a competitive edge over thrifts in the mortgage market through Fannie Mae's secondary
programs, programs to which thrift institutions also had access.
Like Fannie Mae, Freddie Mac was created as a
quasi-governmental company, which
provided it with efficient, low-cost access to the capital markets and
exempted it from most mortgage and securities laws
and regulations applicable to private companies. These benefits enabled
Freddie Mac, as well as Fannie Mae, to operate with significant
competitive advantages. Freddie Mac was to be owned by the Federal Home Loan Bank system,
at the time the equivalent of the Federal Reserve for the thrift
industry.
The original reasoning for creating Freddie
Mac made sense to me then, and it still makes sense now.
But, it didn't quite happen the way the founding sponsors thought it would.
Freddie Mac and Fannie Mae now virtually control
the market for residential mortgages that conform to their maximum
loan size limits. The negative impact of this concentration has
been substantial and it could get even worse.
Don't
get me wrong, Freddie Mae and Fannie Mae have done a great deal to
improve the public's access to mortgage capital at competitive
rates. But, as is often the case, the government deviated from
it original strategy for Freddie Mac by completing only the first phase of
it. It did not carry out the second phase
and turn over the benefit of these market improvements to the private
sector. Had this been done, today there would be a multitude of
private thrifts competing as mortgage lenders (and providing many other
lending services as well, including commercial mortgages), not just two giant
ones.
The concentration of
control in two giant companies is not
good for the private mortgage sector because, like anti-trust issues,
it stifles competition. The concentration of risk is not good
because one day the mortgage sector may encounter problems that, because
they're concentrated in two giant companies, could be enormous, thereby creating major problems for the
mortgage markets, the capital markets, and the taxpayers.
Any business in which the government
gets involved is in danger of eventually becoming nationalized.
We don't need a nationalized mortgage system, residential or
commercial, any more than we need a nationalized health care system.
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