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Fannie, Freddie to Lose Free Advances From Fed
Privilege Unavailable to Other Firms
By Kathleen Day
Washington Post Staff Writer
Friday, February 6, 2004; Page E02
The Federal Reserve said yesterday that it will stop giving mortgage-funding giants Fannie Mae and Freddie Mac, and the 12-member Federal Home Loan Bank System, interest-free advances that save the government-sponsored enterprises tens of millions of dollars a year.
The policy change, which will be implemented in July 2006, comes as the Bush administration and key members of Congress are pushing for tougher oversight of the GSEs since the $5 billion accounting scandal at Freddie Mac.
It reflects the rapid growth in GSEs and increasing worry among both Republicans and Democrats that their immense size makes them potential risks to the economy.
GSEs are congressionally chartered companies that borrow money to lend to banks and other financial companies that make home loans. They are owned by shareholders but receive billions of dollars a year in tax breaks or other exemptions not available to other public companies, including their competitors.
The Fed, whose chairman, Alan Greenspan, has questioned whether the enterprises' advantages are warranted, said the two-year delay will give the companies time to adjust. At that time the Fed, which acts as an intermediary between the companies and their debt holders, will no longer pay interest and principal on the companies' obligations unless they have that amount in their accounts at the Fed.
Today, the Fed makes those payments in the morning, when it also makes payments on U.S. obligations. But it does not require the GSEs, or other financial organizations such as the World Bank, to repay them until early evening. The companies have been investing -- -and earning interest on -- the money in the intervening hours.
A decade ago, the Fed advanced payments on $20 billion on a peak day on behalf of the GSEs and others, a spokesman said. Today that amount easily reaches $145 billion. The Fed said it was not appropriate for the nation's central bank to give those companies such a large benefit.
"In a year of extraordinary volume like last year, had this policy been in place, and we not adjust our business practices, we would have incurred $11 million in overdraft expense," said Charles V. Greener, Fannie Mae spokesman. He said that with two years before implementation, the company can figure out how to adjust its practices to minimize the cost of the change.
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