By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, March 7, 2007
Federal Reserve Chairman Ben S. Bernanke said yesterday that the scale of Fannie Mae's and Freddie Mac's mortgage investments could pose risks to the financial system, and he called for them to limit their holdings almost exclusively to loans for affordable housing.
Bernanke's proposal would sharply curtail the growth and profits of the government-chartered mortgage-funding companies, and it would force them to focus on investments that have, as he described it, "a clear and measurable public benefit."
Congressional efforts to overhaul regulation of Fannie Mae and Freddie Mac have been moving in a different direction.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, thinks a new regulator should be empowered to control the size of the companies' investment portfolios as needed to ensure their financial safety and soundness, said Steve Adamske, a spokesman for Frank. The House passed legislation along those lines last year, but the Senate took no action.
Fannie Mae and Freddie Mac have $1.4 trillion of mortgage-related investments, which are sensitive to movements in interest rates and require extensive hedging to reduce risk. The companies have debts and outstanding-credit guarantees of $5.2 trillion, exceeding the U.S. government's $4.9 trillion of publicly held debt, Bernanke said.
Chartered by the government to promote home ownership, Fannie Mae and Freddie Mac have two main lines of business: They package mortgages into securities for sale to investors, guaranteeing that the investors will be paid; and they make investments of their own. They are required to devote a portion of their funding to mortgages on affordable housing, such as loans for homes in poorer neighborhoods.
According to the Fed, the perception that the government stands behind Fannie Mae and Freddie Mac enables them to borrow at low interest rates and buy assets with higher returns in a kind of perpetual-profit machine. That gives them an incentive to expand their holdings, Bernanke said.
In his first speech on Fannie Mae and Freddie Mac, Bernanke echoed longstanding Fed concerns. Although the Fed has concluded that they do not seem to pose an immediate threat, "their portfolios represent a potentially significant source of systemic risk," Bernanke said.
His solution: "Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general -- not just GSE shareholders -- receives a meaningful return in exchange for accepting the risks inherent in the portfolios," Bernanke said in the text of remarks prepared for delivery by satellite to a gathering of community bankers in Hawaii.
Less than a third of the companies' mortgage holdings advance the government's affordable-housing goals, according to an estimate by the Office of Federal Housing Enterprise Oversight, a regulatory agency.
Freddie Mac spokeswoman Sharon McHale said all of the loans in Freddie Mac's portfolio promote affordable housing in one way or another. "Our entire portfolio is critical to us achieving our housing mission," McHale said.
A Fannie Mae spokesman declined to comment.
How, if at all, to limit the companies' investments has been one of sticking points in long-stalled but recently renewed legislative efforts. A proposal supported by the Treasury Department last year would have made affordable housing one of the factors for a government regulator to consider when setting portfolio standards.
Howard Glaser, a mortgage industry consultant, said Bernanke's proposal is "not going to fly." That approach "is not a new idea, but it's one that's been implicitly abandoned as the legislative debate has moved on," Glaser said.