Reins Kept on Fannie, Freddie

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, August 11, 2007

A government agency yesterday refused to loosen restraints on Fannie Mae and Freddie Mac so they could play a larger role in the troubled mortgage markets.

The companies, which were created by the government to provide funding for home loans, had argued that they could help struggling lenders and borrowers if regulators allowed them to buy more mortgages and mortgage-related investments.

But the Office of Federal Housing Enterprise Oversight said yesterday that Fannie Mae and Freddie Mac can pick up slack in the markets by more efficient means -- packaging mortgages into securities for sale to other investors. The agency cast doubt on the potential benefits of letting the companies buy more, saying that the prime segment of the market in which they operate is generally free of trouble.

The agency added that it was still concerned about the safety and soundness of the companies, which remain unable to issue timely financial statements years after accounting scandals exposed weaknesses in their internal controls. Those concerns are what inspired the agency to negotiate the caps on the companies' investments last year, OFHEO said.

OFHEO "will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time," James B. Lockhart III, the agency's director, said in a news release.

Lockhart said the agency was exploring ways for the companies to "enhance their support for affordable housing," but he didn't say what that might involve.

The companies' stocks have shot up over the past week based on perceptions that they stand to benefit from the mortgage industry's woes and on anticipation that OFHEO would lift the caps. The stocks continued to climb even after President Bush threw cold water on the notion of raising the caps in comments earlier this week.

OFHEO, which isn't required to follow the president's lead, announced its decision yesterday after the markets had closed.

For Fannie Mae and Freddie Mac, the battle wasn't a total loss. On the field of public relations, they were able to cast themselves as willing to ride to the rescue while their nemeses in the government stood in the way.

Early yesterday, Fannie Mae chief executive Daniel H. Mudd issued a statement arguing that raising the company's investment cap by 10 percent "would help to alleviate the ongoing credit crunch . . . and bring an additional measure of stability." On Thursday, Mudd went on television to deliver a similar message.

For years, politicians and regulators have accused the companies of doing little for the public benefit while using their federally chartered status to the advantage of their shareholders and executives. Meanwhile, the Federal Reserve has declared that the companies have gotten so big that they could pose a risk to the financial system. Together, they hold or guarantee 40 percent of the mortgages in the United States, according to OFHEO.

That agency has been a persistent critic, issuing reports on alleged accounting manipulations and joining the Bush administration in demanding tighter regulation of the companies than many in Congress have been willing to support.

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