Fannie Mae's stock closed at its lowest point in more than four years yesterday after Federal Reserve Chairman Alan Greenspan this week again endorsed limits on the company's growth.
Greenspan told the House Financial Services Committee on Thursday that the mortgage finance company and its smaller twin, Freddie Mac, should shrink their huge mortgage portfolios over time.
Fannie Mae and Freddie Mac's mortgage portfolios total nearly $1.8 trillion.
(Jay Mallin -- Bloomberg News)
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Both Fannie's and Freddie's own mortgage portfolios -- loans and mortgage-backed securities they buy and keep for their own account instead of selling into the secondary mortgage markets -- have grown significantly in recent years. Those portfolios total nearly $1.8 trillion and have roughly doubled since 1999.
Paul Miller, who follows Fannie and Freddie for Friedman, Billings, Ramsey Group Inc., said proposals to curb the company's growth have been under consideration for several months, but "talk of winding them down is outlandish, and it's really rattled the markets."
Greenspan and other critics of the companies have criticized their growth for two main reasons. They contend that Fannie and Freddie are using their government-sponsored borrowing advantage to build huge portfolios to make more money for their shareholders and that the sheer size of the companies' balance sheets poses risks to the mortgage finance market if either should run into financial trouble.
Rep. Richard H. Baker (R-La.) has proposed legislation that would tighten regulation of Fannie, Freddie and other so-called government-sponsored enterprises. Under questioning from Baker about limiting the size of the enterprises, Greenspan said Fannie and Freddie's huge growth has "no reasonable basis."
"It's an add-on which occurs as best we can judge -- and we've tried to think of all other possible purposes -- very largely to create increased profits for these organizations," he said.
Greenspan said both Fannie and Freddie need to maintain large securities portfolios to meet their own and the mortgage market's liquidity needs. Just not such large ones.
"What I would suggest is that for liquidity purposes they're able to hold U.S. Treasury bills in whatever quantity they would choose," he said. "A $100 billion, $200 billion -- whatever the number might turn out to be -- limit on the size of the aggregate portfolios of those institutions."
Greenspan said that such large portfolios require dynamic hedging strategies to reduce interest-rate risk and that hedging creates systemic risk if it goes awry.
"There is no risk now at the moment," he said. "It's the time, therefore, to act, to do something to fend off problems, which in my judgment seem almost inevitable as we look forward into the remainder of this decade."
He recommended action that would require Fannie and Freddie to shrink their mortgage portfolios over "several years."
Greenspan's comments echoed his previous criticisms, but his explicit language, coupled with Baker's promise to introduce legislation in the wake of accounting scandals at both companies in the past two years, caused the stocks of both companies to drop.
Fannie stock lost $1.71 yesterday to close at $58.90, its lowest point since September 2000. Freddie lost $2.17 to close at $61.73, still above its 52-week low of $56.45. Both stocks have been on the decline since December.
David R. Palombi, a Freddie Mac spokesman, said that his company's large retained portfolio of mortgages is central to its role of providing capital for the mortgage market, and that it could help reduce shocks to the mortgage finance system. Curtailing that ability would harm the company's mission, he said.
"Our retained mortgage portfolio helps us fulfill our charter purposes of providing liquidity and stability to the U.S. residential mortgage market in good and bad economic times," Palombi said.
A Fannie Mae spokesman declined to comment.
