Greenspan urges limits on Fannie, Freddie

Greenspan’s remarks about the two mortgage giants repeated a warning that the Fed chief has been issuing for more than a year: that the country’s financial system could be put at risk unless the growth of the two giant mortgage lenders is restrained.

Limiting the size of Fannie’s and Freddie’s portfolios won’t affect mortgage rates for homeowners, Greenspan said, citing a study by the Federal Reserve.

At the end of 1990, Fannie’s and Freddie’s combined portfolios amounted to $132 billion, or 5.6 percent of the single-family home mortgage market, Greenspan said. By 2003, those combined portfolios had grown tenfold, to $1.38 trillion or 23 percent of the single-family home-mortgage market, he said.

Greenspan said Congress should either set a limit on the two mortgage companies’ portfolio holdings or lay out guidelines for regulators to use.

When the two companies were small, the potential for risk to the financial system and the overall economy was pretty small, Greenspan said. “Regrettably, that is no longer the case,” he added.

Because the institutions have grown so large, the risk is that a failure of one or them would probably put the federal government in the position of having to bail out investors.

Currently, the two institutions are hedging their risk and are financially okay, Greenspan said. He urged Congress to act now — in the absence of a crisis. If the companies were to hit a problem hedging risks, “we know with a high degree of probability that something adverse will go wrong,” he said.

Prospects for passage of a bill to tighten regulation on Fannie Mae and Freddie Mac appear stronger now after failed attempts in the past. “It is of utmost importance to enact legislation this year,” said Elizabeth Dole, R-N.C., who helped write a bill tightening controls over the two mortgage companies.

Federal regulators last year accused Fannie Mae of serious accounting problems. It was ordered to restate earnings back to 2001, a correction that could reach an estimated $11 billion. The accounting fiasco led to the ouster of the company’s chief executive and top financial officer.

Freddie Mac had its own accounting debacle in 2003, where three top executives were forced out. It had misstated earnings by $5 billion for 2000-2002.

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