The chairman of the Federal Reserve Board has told a Senate committee he believes mortgage interest rates would rise only slightly if the government-backed mortgage-buying corporations were forced to maintain the highest private credit ratings.
However, in his letter to Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Banking Committee, Fed Chairman Alan Greenspan did not give a numerical estimate of the likely increase, saying only that studies suggested it would be "relatively small."
In follow-up questions to recent Greenspan testimony, Riegle had said the Treasury's proposal that the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) be required to win and maintain the best private credit ratings, triple-A ratings, from the private credit-rating agencies.
Riegle asked for Greenspan's estimate of how much mortgage interest rates would rise if the proposal were adopted.
Rates would be expected to rise because the corporations would be required to raise more shareholder capital to win the highest rating. They can operate with less capital now because the credit and capital markets assume the government would not let the corporations fail.
In his response, Greenspan said it was unclear how much of the subsidy represented by the implicit government guarantee gets passed along to people who take out mortgages and how much is retained by shareholders of the corporations.
But Greenspan noted that prices of shares in the corporations had declined following the Treasury proposal, "suggesting a sizable proportion of the subsidy has gone to shareholders."
Studies suggest the subsidy going to mortgage holders, which would be lost under the Treasury proposal, is "relatively small," Greenspan wrote.