Reins Kept on Fannie, Freddie

Analysts generally agreed that allowing Fannie Mae and Freddie Mac to increase their investments would boost their profits. Leaving a cap on their investments could prevent them from seizing a rare opportunity to buy huge volumes of assets at fire-sale prices.

But there was disagreement and uncertainty as to who else would benefit from a lifting of the caps.

"We want to know how that would be linked to keeping people in their homes," said Allen Fishbein, the Consumer Federation of America's director of housing and credit policy. "I don't think I've seen enough information to determine how that would work."

In an appearance on the financial cable channel CNBC on Thursday, Mudd said Fannie Mae would use added buying power to help people trying to finance apartment buildings and credit-worthy borrowers who are locked in subprime loans. Mudd noted that the company was prohibited from funding mortgages of more than $417,000, known as jumbo mortgages, and he said it would take an act of Congress to change that.

Much of the pressure to raise the investment caps was coming from Wall Street, and some observers said giving Fannie Mae and Freddie Mac a freer hand would primarily benefit institutional investors such as hedge funds holding assets that have plunged in value.

Bailing out investors could enable them to pump more cash into the mortgage market, but it wouldn't obligate them to do so.

"Buying more of the distressed subprime or Alt-A [unconventional mortgage] securities tilts more toward a lift for Wall Street balance sheets than toward subprime borrowers," Steven Abrahams, a senior managing director at Bear Stearns, said in a report this week.

Fannie Mae and Freddie Mac "have the means to make meaningful purchases without breaching their portfolio limits," analysts at Bank of America said yesterday in a report to clients.

Some troubled lenders were looking to Fannie Mae and Freddie Mac for relief. But others in the financial services industry opposed strengthening the companies' hands.

"Calls to extend the reach and authority of Fannie Mae and Freddie Mac into the healthy and functioning primary mortgage market provided by community lenders appear unjustified," Alfred A. DelliBovi, president of the Federal Home Loan Bank of New York, said in a letter to OFHEO.

Since the companies were found to have misstated their finances by billions of dollars, policymakers generally have agreed that the regulators need more power, but they have argued to a stalemate over details.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in an interview this week that the debate over Fannie Mae and Freddie Mac was largely ideological, dividing policymakers who believe the companies have an important role to play in support of housing from others who believe government-sponsored enterprises have no place in the private market.

The upheaval in the financial markets over the past week may have altered the debate, giving new urgency to the legislation -- and additional focus to the potential good Fannie Mae and Freddie Mac can do, some observers said.

Yesterday, Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) reaffirmed his view that regulators could safely ease the caps. "The Administration can't continue to close their eyes to the scope of the problem and hope it goes away," he said in a statement.