Exclusive: Freddie Mac CEO sees market stability risk in housing bill

By Margaret Chadbourn

WASHINGTON (Reuters) - A U.S. Senate bill on housing finance reform could undermine the stability of the mortgage market if it became law in its current form, the head of government-run mortgage financier Freddie Mac warned the company's regulator.

Donald Layton, chief executive of Freddie Mac, said in an April 16 letter to the director of the Federal Housing Finance Agency that lawmakers should take steps to make sure the company can fulfill its role supporting the mortgage market during any transition period to its eventual closure.

The bill, written by Senate Banking Committee Chairman Tim Johnson, a Democrat, and Senator Mike Crapo, the panel's top Republican, would replace Freddie Mac and larger rival Fannie Mae with a new government mortgage reinsurer. The panel is scheduled to take up the legislation on Tuesday.

"The risk that Freddie Mac would not be able to carry out its core policy function is extremely high," Layton said. A copy of the letter was obtained by Reuters.

Fannie Mae and Freddie Mac, which were seized by the government in September 2008 at the height of the financial crisis, are the primary sources of U.S. mortgage funds. They buy loans from lenders and turn them into mortgage-backed securities, which they sell to investors with a guarantee.

"The ability of Freddie Mac to continue to support the mortgage markets and the U.S. economy during an unprecedentedly lengthy transition period should be one of the most important objectives," Layton wrote. "The existing bill draft does not focus on this issue."

The Johnson-Crapo bill provides for a five-year wind-down of Fannie Mae and Freddie Mac, which could be extended if needed to prevent market disruptions or an increase in borrowing costs.

Layton said that during the time it would take to phase out his company, there would be an "extremely high risk" that Freddie Mac would not be able to carry out its core function of ensuring the "liquidity, stability, and affordability of U.S. housing markets."

He expressed concern the bill does not clearly establish what the government-run companies would be expected to do during the transition period, and said there was the potential for a staff exodus that would further impair business.

Separately, Fannie Mae, in a document sent to the banking committee and seen by Reuters, said the home loan system the bill would create would result in higher loan fees and a reduction in the availability of affordable mortgages.

"Several provisions in the statute require costs or fees to pay for the establishment and maintenance of the new housing finance system," the document stated. "These fees would ultimately be passed on to consumers in the form of higher-cost mortgages."

The regulator of the companies also submitted a document to the banking committee in which it identified possible problems with how the bill establishes a new housing finance framework.

It noted that large banks would end up playing several roles in the envisioned system, thus dominating the housing market.

The legislation already faces an uphill struggle to gain the support it needs to advance in the Senate before lawmakers turn their focus to November's midterm elections. Analysts predict the measure is unlikely to become law this year.