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Fannie Mae, Freddie Mac Agree to Stricter Financial Disclosure

WASHINGTON, DC-Fannie Mae and Freddie Mac agreed to greater financial disclosure, allaying concerns that the two government-sponsored home mortgage lenders are growing too quickly, but not silencing political critics. The deal would require them to issue new subordinated debt as insurance against financial crises.

By Mike Cleary | Updated on October 24, 2000

WASHINGTON DC-Wall Street hailed announcements by Fannie Mae and Freddie Mac that they would disclose more information about their credit strength, but political critics say the two big mortgage lenders didn’t go far enough. Critics say the two government-sponsored companies are growing too quickly and risk a financial calamity as a result.

Their combined debt will exceed that of the Treasury by 2004 at their current pace.In answer to questions about the safety of their financial operations, the two companies agreed to several concessions. First, they will undergo regular review by debt raters such as Moody’s Investor Service Inc. or Standard & Poor’s, and publicly report the results of risk assessments. They also agreed to create and conduct stress tests of their operations and issue subordinated debt to raise the level of capital in their portfolios. This would provide insurance in case of an abrupt market collapse.

Currently, the two companies enjoy the implied backing of the Federal government, which is one reason their debt is rated triple-A. The new subordinated debt would not have that benefit, but be rated like any other debt. This would give investors more insight into the companies’ credit quality, one of the reasons the agreement was welcomed on Wall Street. Both companies’ stocks went up to 52-week highs before receding from the peaks, still better than they started.

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