Greenspan urges cuts at Fannie, Freddie

Fed chief says $1.5 trillion mortgage portfolio will cause problems for nation's financial system.

February 18, 2005: 9:19 AM EST
      


WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan urged Congress to significantly cut the mortgage portfolios of the big mortgage firms Fannie Mae and Freddie Mac to avoid "almost inevitable" problems for the U.S. financial system.

Greenspan has in the past expressed concern about the growth of the companies' mortgage holdings, saying they could pose a risk if allowed to increase unchecked. The Fed chairman went farther Thursday, telling members of the House Financial Services Committee they should require the companies to slash their mortgage holdings.

Congress is weighing tighter supervision of the mortgage finance companies after accounting controversies and senior management ousters at both firms in 2003 and 2004.

Fannie Mae (Research) and Freddie Mac (Research) buy home loans from lenders and repackage them as securities for investors, but they also retain mortgages and mortgage-backed securities for their portfolios.

Congress chartered the shareholder-owned companies to ensure there are plenty of funds available for home buyers to take out mortgages.

Greenspan said in response to lawmakers' questions that the growth of those portfolios, which together top $1.5 trillion, primarily allows the companies to leverage their federal charters to generate substantial profits.

"We have found no reasonable basis for that portfolio above very minimal needs and what I would suggest is that for liquidity purposes they're able to hold U.S. Treasury bills in whatever quantity they would choose ... and a $100 billion, $200 billion, whatever the number might turn out to be, limit on the size of the aggregate portfolios of those institutions," he said.

A Freddie Mac official disagreed with Greenspan, saying that Freddie Mac's mortgage and mortgage-security purchases pump money into mortgage markets, lowering costs by boosting demand and guaranteeing stability even during unsettled periods, such as the Asian debt crisis of 1997-1998.

"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," said Freddie Mac spokeswoman Sharon McHale.

But Greenspan said congressional failure to cap the growth of the companies' mortgage portfolios would invite potentially serious risk. He recommended that lawmakers pass legislation within several years requiring Fannie Mae and Freddie Mac to divest a large share of their holdings.

"Over time, several years, that should be done because these institutions, if they continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios which they need to do for interest risk diversion, they potentially create ever-growing potential systemic risk down the road," Greenspan said.

While there is no risk now, problems are "almost inevitable" in the remainder of the decade if lawmakers fail to act, he added.

"If you get large enough ... and something goes wrong, then we have a very serious problem, because the existing conservatorship does not create the funds which would be needed to keep these institutions going in the event of default, which is what the conservatorship is supposed to do, and we have no obvious stabilizing force within the marketplace," he said.

"Enabling these institutions to increase in size -- and they will, once the crisis passes ... -- we are placing the total financial system of the future at a substantial risk," Greenspan added.

Rep. Richard Baker, a Louisiana Republican, said he is considering a proposal to limit the size of their portfolios.  Top of page

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