Bernanke to Congress: Toughen Up On Freddie Mac, Fannie Mae
Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, suggested a limit on their massive holdings to guard against any danger their debt poses to the overall economy.
Bernanke has previously supported efforts to pare the two mortgage company portfolios. This time, however, he was a bit more specific and recommended that their holdings might be linked to a “measurable public purpose, such as the promotion of affordable housing.”
The head of the U.S. central bank made the suggestion as part of his remarks delivered via satellite to a meeting in Hawaii.
Bernanke’s comments come as more worries about risky home loans are making investors jittery. Those fears contributed to last week’s worldwide stock meltdown, where the Dow Jones suffered a 416-point plunge.
Wall Street staged a rebound Tuesday, gaining more than 150 of it back.
Lenders to subprime (bad credit home loan) borrowers — people with poor or bad credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up.
Delinquencies and foreclosures in the subprime mortgage market are spiking, one mortgage lender after another is experiencing problems and investors are worrying.
Against this backdrop, Bernanke said that by suggesting a change in Fannie Mae’s and Freddie Mac’s portfolio holdings, he was not advocating a change in the exposure of the mortgage giants’ subprime loans.
Last week, Freddie Mac announced that it would no longer buy certain risky, bad credit mortgages.
Fannie Mae is the No. 1 U.S. buyer of home mortgages; its rival, Freddie Mac, ranks as the second-largest buyer.
Fannie Mae and Freddie Mac — government-sponsored enterprises, or GSEs — were created by Congress to inject money into the market by buying bad credit mortgage loans and conventional mortgages from banks and other lenders.
They bundle the home loans into securities for sale on Wall Street. Both companies have been scarred by accounting scandals.
On Capitol Hill, various efforts over the past several years to tighten the reins on Fannie Mae and Freddie Mac have ultimately languished. With the Democrats now in control of Congress, renewed efforts are expected to be forged.
“Legislation to strengthen regulation and supervision of GSEs is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them toward activities that provide important social benefits,” Bernanke told the banking gathering.
He said the Fed would like to see legislation passed this year.
Fannie Mae’s and Freddie Mac’s combined portfolios from the end of 1990 until the end of 2003 have grown more than tenfold — to $1.56 trillion, Bernanke said. Besides buying mortgage-backed securities, the mortgage giants purchase other assets for their own investment portfolios.
Yet, less than 30 percent of their current portfolio holdings are oriented toward affordable housing, Bernanke said.
“A straightforward means of anchoring the GSE portfolios to a clear public mission would be to require Fannie and Freddie to focus their portfolios almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing,” he said.
Bernanke did not provide any fresh insights on the turmoil seen over the past week on Wall Street in his speech or in a brief question-and-answer session afterward.
He also did not talk about the future course of interest rates, with shape mortgage rates for consumers, in the United States. Many economists predict the Fed will hold rates steady when it meets later this month.
SOURCE: Associated Press