ASSISTANT SECRETARY

DEPARTMENT OF THE TREASURY                         WASHINGTON                       October 6, 1998

The Honorable Trent Lott
Majority Leader
United States Senate
Washington, D.C. 20510

Dear Mr. Leader:

We understand that the conference report on the HUD-VA appropriations bill would permit the Federal Home Loan Mortgage Corporation (Freddie Mac) to self-insure against the entire credit risk of mortgages it guarantees.

This provision, never adopted by either House of Congress and never previously a part of this bill, may have significant consequences for Freddie Mac and the private mortgage insurance industry. It should receive careful, deliberate consideration, including public hearings. We oppose including it as a last-minute rider on an appropriations bill, and we currently have the following concerns about it:

• As a government sponsored enterprise, Freddie Mac receives numerous benefits from the federal government -- benefits unavailable to fully private firms -- in exchange for serving a public purpose. These benefits give Freddie Mac a substantial competitive advantage over fully private firms. To the extent that the provision would shift mortgage credit risk from private mortgage insurance companies to Freddie Mac, the provision may:

-- increase the concentration of credit risk (previously shared with private mortgage insurers) in Freddie Mac;

-- reduce the market discipline provided by private mortgage insurers' assessment of mortgage credit risk (and instead place increased reliance on the judgment of government regulators); and

-- raise questions about the long-term viability of private mortgage insurers in the market served by Freddie Mac.

• Congress should consider whether the private market adequately and effectively offers mortgage credit enhancements and whether the expected benefits of the provision offset any increased risks and costs.

• The provision has the potential to diminish the government's revenues, perhaps significantly. Consumer payments for private mortgage insurance are not tax deductible, whereas mortgage interest payments generally are deductible. If Freddie Mac self-insures the credit risk previously covered by private mortgage insurance, it may do so by charging slightly higher mortgage interest rates. If the higher rates are deductible, the effect would be to reduce the government's revenues.

We stand ready to work with you and others to address this issue in other legislation.

Sincerely,

/s/

Richard S. Carnell
Assistant Secretary of the Treasury
for Financial Institutions

(Identical letter sent to the Honorable Tom Daschle)

ASSISTANT SECRETARY

DEPARTMENT OF THE TREASURY                         WASHINGTON                       October 6, 1998

The Honorable Tom Daschle
Democratic Leader
United States Senate
Washington, D.C. 20510

Dear Senator Daschle:

We understand that the conference report on the HUD-VA appropriations bill would permit the Federal Home Loan Mortgage Corporation (Freddie Mac) to self-insure against the entire credit risk of mortgages it guarantees.

This provision, never adopted by either House of Congress and never previously a part of this bill, may have significant consequences for Freddie Mac and the private mortgage insurance industry. It should receive careful, deliberate consideration, including public hearings. We oppose including it as a last-minute rider on an appropriations bill, and we currently have the following concerns about it:

• As a government sponsored enterprise, Freddie Mac receives numerous benefits from the federal government -- benefits unavailable to fully private firms -- in exchange for serving a public purpose. These benefits give Freddie Mac a substantial competitive advantage over fully private firms. To the extent that the provision would shift mortgage credit risk from private mortgage insurance companies to Freddie Mac, the provision may:

-- increase the concentration of credit risk (previously shared with private mortgage insurers) in Freddie Mac;

-- reduce the market discipline provided by private mortgage insurers' assessment of mortgage credit risk (and instead place increased reliance on the judgment of government regulators); and

-- raise questions about the long-term viability of private mortgage insurers in the market served by Freddie Mac.

• Congress should consider whether the private market adequately and effectively offers mortgage credit enhancements and whether the expected benefits of the provision offset any increased risks and costs.

• The provision has the potential to diminish the government's revenues, perhaps significantly. Consumer payments for private mortgage insurance are not tax deductible, whereas mortgage interest payments generally are deductible. If Freddie Mac self-insures the credit risk previously covered by private mortgage insurance, it may do so by charging slightly higher mortgage interest rates. If the higher rates are deductible, the effect would be to reduce the government's revenues.

We stand ready to work with you and others to address this issue in other legislation.

Sincerely,

/s/

Richard S. Carnell
Assistant Secretary of the Treasury
for Financial Institutions

(Identical letter sent to the Honorable Trent Lott)