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Bernanke: Toughen Up on Mortgage Giants
By JEANNINE AVERSA
AP Economics Writer
WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke
urged Congress on Tuesday to bolster regulation of mortgage
giants Fannie Mae and Freddie Mac, and suggested limiting
their massive holdings to guard against any danger their
debt poses to the overall economy.
Bernanke has previously supported efforts to pare the
two mortgage companies' huge portfolios. This time, however,
he was a bit more specific and recommended that their
holdings might be linked to a "measurable public
purpose, such as the promotion of affordable housing."
The Fed chief's suggestion was contained in remarks
delivered via satellite to a bankers meeting in Hawaii.
His remarks come as worries about risky mortgages are
making investors jittery. Those fears contributed to
last week's worldwide stock meltdown, where the Dow Jones
industrials suffered a gut-wrenching 416-point plunge.
Wall Street on Tuesday staged a rebound, gaining more
than 150 points.
Lenders to subprime borrowers - people with blemished
credit histories - have been battered. Rising interest
rates and weak home prices have made it increasingly
difficult for these borrowers - especially those with
adjustable-rate mortgages - to keep up with their mortgage
payments. Delinquencies and foreclosures in the subprime
mortgage market are spiking.
Against this backdrop, Bernanke said he wanted to be
clear that by suggesting the change in Fannie Mae's and
Freddie Mac's portfolio holdings, he was not advocating
a change in the exposure of the mortgage giants' subprime
loans.
Last week, Freddie Mac announced that it would no longer
buy certain risky, subprime mortgages.
Fannie Mae is the No. 1 U.S. buyer of home mortgages;
its rival, Freddie Mac, ranks as the second-largest buyer.
Fannie Mae and Freddie Mac - also referred to as government-sponsored
enterprises, or GSEs, - were created by Congress to inject
money into the mortgage market by buying home loans from
banks and other lenders. They bundle the mortgages into
securities for sale on Wall Street. Both companies have
been scarred by accounting scandals.
On Capitol Hill, various efforts over the past several
years to tighten the government's reins on Fannie Mae
and Freddie Mac have ultimately languished. With Democrats
in control of Congress, renewed efforts are expected
to be forged.
"Legislation to strengthen the regulation and supervision
of GSEs is highly desirable, both to ensure that these
companies pose fewer risks to the financial system and
to direct them toward activities that provide important
social benefits," Bernanke told the banking gathering.
He said the Fed would like to see legislation passed
this year.
Rep. Barney Frank, D-Mass., chairman of the House Financial
Services Committee, is proposing legislation that would
give the regulator of Fannie Mae and Freddie Mac the
discretion to limit or reduce the two mortgage companies'
holdings.
Sen. Richard Shelby of Alabama, the top-ranking Republican
on the Senate Banking Committee, said he shares many
of Bernanke's concerns. "We should pay close attention
to the issues he has identified," Shelby said.
Fannie Mae's and Freddie Mac's combined portfolios from
the end of 1990 until the end of 2003 have grown more
than tenfold - to $1.56 trillion, Bernanke said. Besides
buying mortgage-backed securities, the mortgage giants
purchase other types of assets for their own investment
portfolios, Bernanke said.
Yet, less than 30 percent of their current portfolio
holdings are oriented toward affordable housing, Bernanke
said.
"A straightforward means of anchoring the GSE portfolios
to a clear public mission would be to require Fannie
and Freddie to focus their portfolios almost exclusively
on holdings of mortgages or mortgage-backed securities
that support affordable housing," he said.
Bernanke did not provide any fresh insights on the turmoil
seen in worldwide financial markets over the past week
in his speech or in a brief question-and-answer session
afterward.
He also did not talk about the future course of interest
rates in the United States. Many economists predict the
Fed will hold rates steady when it meets later this month.
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