The U.S. Treasury Department wants to expand its power to regulate how Fannie Mae and Freddie Mac access the debt markets in a reform that could stifle growth of the mortgage finance companies' investments, according to a document obtained by Reuters.
An outline of the proposed Treasury plan would require Fannie and Freddie to "estimate total debt outstanding (with high and low range) during the upcoming six-month period" and envisions penalties if the companies exceed the debt ceiling.
Fannie and Freddie are not currently required to give Treasury long-term outlooks of their funding needs.
The plan envisioned by Treasury would require the two government-sponsored enterprises to get department approval before any debt issuance that "may materially change the risk profile of the enterprises" or "may have significant spillover effects," according to the outline.
Sources close to the GSEs say that language could be construed as a Treasury test to gauge whether the companies' debt issuance might imperil the broader economy.
Fannie and Freddie critics have warned that the companies' investment holdings, valued at roughly $1.4 trillion, are so large that they pose a potential "systemic risk" to financial systems.
The GSEs issue corporate obligations known as "agency" debt to fund their profit-making portfolio of mortgage investments.
Last November, a senior Treasury official said Fannie and Freddie would soon have to give the department advance notice of its intentions to sell corporate debt because the current review process was too haphazard.
Treasury has asserted it has the authority to approve such issuance because Fannie and Freddie hold government charters.
In November, the Treasury official described the new system as a good governance tool and said that it could be in place by January 2007.
Fannie, Freddie Fear Distruptions
Sources close to the discussions between Treasury and the GSEs said this week that months-long talks over the issue have broken down as Fannie and Freddie officials' concern increased that the new debt protocol could be used as a tool to disrupt their businesses.
On Friday, Fannie and Freddie both sent a letter to Treasury suggesting that its current debt oversight powers are sufficient, sources familiar with the letter said.
A Treasury spokeswoman, Jennifer Zuccarelli, said the department's review "is being viewed as technical" and nothing more than a housekeeping measure to improve its oversight.
Under orders from the GSE's chief regulator, the Office of Federal Housing Enterprise Oversight, Fannie and Freddie investment holdings are capped near their current level but those caps could be removed in February.
Sources familiar with thinking at the GSEs said Fannie and Freddie worry that their detractors may be eyeing a new Treasury debt review process as the next tool to limit their investment growth once the OFHEO caps are removed.
The OFHEO caps were first imposed over a year ago in the wake of accounting scandals at the two companies.
In January, Rep. Barney Frank, who chairs the House Financial Services Committee, said Treasury Secretary Henry Paulson personally assured him that the review would not disrupt GSE business.
Lawmakers in Congress and the administration of President Bush are now trying to negotiate legislation that would create a new regulator for Fannie and Freddie. How, or whether, the companies' investments should be curtailed is a key question in that debate.
Democratic lawmakers have called on the Bush administration to ease the investment limits so that the companies can stabilize the mortgage market recently shaken by a spike in foreclosures.
"It's disappointing that the Administration would choose this time for adding new restrictions on the GSEs' portfolios," Rep. Melissa Bean, a Democrat from Illinois said in a statement Friday.
Senator Charles Schumer, a New York Democrat and ally of the two GSEs, said "In this critical time of mortgage market turmoil, the administration should refrain from doing anything that would handicap Fannie and Freddie's ability to provide much-needed relief to subprime borrowers."
Subprime borrowers, who won a mortgage despite shaky credit, have seen the sharpest rise in defaults in recent months.