Senators: Freddie Mac, Fannie Mae Should Be Geared On Affordable Housing

Senate critics of Fannie Mae and Freddie Mac seek to tie the mortgage finance companies’ profit-making investments to lower-cost housing, according to a bill introduced on Thursday.The plan endorsed by four outspoken Republican critics of Fannie Mae and Freddie Mac picks up on a suggestion from Federal Reserve Chairman Ben Bernanke, who recently suggested that the mortgage companies’ investments be “anchored” in affordable housing investments.

How a new regulator should best manage the two enterprises’ $1.4 trillion investment portfolios has become a key issue in the reform debate.

Critics of the two companies, which provide many thousands of home mortgage loans to U.S. applicants, have called their investment assets extremely and dangerously bloated.

Fannie Mae and Freddie Mac counter that their portfolios are a vital business tool that helps stabilize the volatile housing market.

Introduced by Republicans Chuck Hagel of Nebraska, Elizabeth Dole of North Carolina, Mel Martinez of Florida, and John Sununu of New Hampshire, the legislation says that:

“The portfolio holdings … should be focused, to the maximum extent possible, on mortgages and mortgage-backed securities that meet the affordable housing goals.”

“Fannie Mae and Freddie Mac must be run properly, with adequate transparency and oversight. We won’t tolerate an intentionally weak regulator,” Dole said.

The legislation also calls on a new regulator for Fannie and Freddie to curb the companies’ investments overall, something that may impact the overall volume of home loans issued by the firms in coming years.

Last month, the House of Representatives Financial Services Committee voted to approve a bill that would give a new GSE regulator broad oversight, but it set no explicit limits on the mortgage companies’ investments.

By limiting the firms’ investments to affordable housing, the measure introduced Thursday would stifle a profitable investment tool.

Among other changes, the legislation omits two key provisions of the House bill: an affordable housing trust fund and a measure that would let Fannie and Freddie invest in expensive mortgage loans.

The reform measure contains many key provisions of a similar bill that passed the Senate Banking Committee in 2005, but was never considered by the full Senate.

Christopher Dodd, the chairman of the Banking Committee, has so far supported the House’s less-stringent version of reform. The Connecticut Democrat has not said when he plans to bring his version of GSE reform to the committee.

Among other provisions, the new bill would allow Fannie Mae and Freddie Mac to close down one of the companies if it were to fail and give that regulator more power to raise capital.

SOURCE: Reuters