Fannie Mae, Freddie Mac CEOs warn against sharp limits on mortgage portfolios

Wednesday, April 20th 2005, 11:03 am

By: News On 6

WASHINGTON (AP) _ The heads of Fannie Mae and Freddie Mac told Congress Wednesday that a severe reduction of their multibillion-dollar mortgage portfolios could hurt the U.S. housing finance market by cutting off billions of dollars from foreign investors.

The government-sponsored companies, long two of the most politically influential in the capital, now face a legislative onslaught that could bring them a tighter government hand.

The two biggest buyers of home mortgages in the country have for years fended off attempts to crimp their privileges or rein in their operations. But recent accounting scandals at both companies _ expected to result in an $11 billion restatement of earnings in Fannie Mae's case _ have given unusual traction to the new legislative press, driven by Republicans.

Fannie Mae interim CEO Daniel Mudd, in testimony prepared for a hearing Wednesday of the Senate Banking Committee, said the company's mortgage portfolio ``makes an important contribution to the liquidity and affordability of the U.S. mortgage market.''

Fannie Mae ``has drawn in billions of dollars from investors abroad to expand the availability and lower the cost of housing for low- and moderate-income Americans,'' Mudd said. ``It is not at all clear that those foreign investors would place their money in the U.S. housing market without the predictability and convenience provided'' by debt issued by Fannie Mae and smaller rival Freddie Mac.

Freddie Mac Chairman and CEO Richard Syron said that while several of the proposals being considered by lawmakers appear ``reasonable, taken together they may result in unintended negative consequences for the nation's housing finance system.''

The push for legislation to create a new regulator with broad power over Fannie Mae and Freddie Mac, and to impose limits on their combined $1.5 trillion mortgage portfolios, garnered the Bush administration's blessing two weeks ago when Treasury Secretary John Snow testified on before the same committee. That amplified the prospects for enactment of oversight legislation this year.

And Federal Reserve Chairman Alan Greenspan, whose views carry considerable weight, urged Congress to restrict the companies' holdings, warning that their huge debt could imperil U.S. financial markets.

Fannie Mae and Freddie Mac support the legislative proposal establishing a stronger regulator to oversee them. But they are resisting attempts to have Congress set mandatory limits on their portfolio holdings.

``We believe a new regulator should have the power to ensure the companies' adherence to our mission and compliance with our charters,'' Mudd said in his testimony. ``That includes the power to approve or disapprove new programs and to monitor new and existing activities through onsite examination.''

Because so many big financial institutions hold large amounts of the $1.8 trillion in debt issued by Fannie Mae and Freddie Mac, a crisis at or failure of either could ripple through the markets, Greenspan and Snow maintained. Congress created the two companies to inject money into the home-loan market, keeping mortgage rates lower. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

Both Mudd and Syron were brought in by the companies' boards to replace ousted chief executives. Fannie Mae's board installed Mudd in December after forcing out CEO Franklin Raines, a high-profile Washington figure, and chief financial officer J. Timothy Howard. Syron became Freddie Mac's chief a year earlier.

In written ``talking points'' distributed to lawmakers in advance of the hearing, Freddie Mac said that ``arbitrarily limiting or reducing the size'' of the portfolios ``would greatly hinder Freddie Mac's ability to provide liquidity and stability to the housing finance market in all economic environments.''