Mortgage Companies Say They're on Track CEOs of Fannie Mae, Freddie Mac Tell Congress That Mortgage Companies Are on Right Course

April 21, 2005

Marcy Gordon
Associated Press

WASHINGTON (AP) -- The heads of embattled mortgage companies Fannie Mae and Freddie Mac told Congress on Wednesday they are on the right course after accounting scandals and that they oppose limiting their combined $1.5 trillion mortgage portfolios.

Despite pressure to tighten regulation of the two government-sponsored companies, the chairman of the Senate Banking, Housing and Urban Affairs Committee indicated that he did not want to go too far.

"No one has suggested giving any bank regulator unbridled authority" over Fannie Mae and Freddie Mac, Sen. Richard Shelby, R-Ala., said at a hearing.

Severely reducing the companies' portfolios could hurt the housing finance market and cut off billions of dollars from foreign investors who help make housing more affordable for moderate-income Americans, according to testimony by Fannie Mae's interim chief executive officer, Daniel Mudd, and Freddie Mac's chairman and chief executive, Richard Syron.

Treasury Secretary John Snow, meanwhile, speaking to a financial group in New York, said, "The ability to limit portfolios is an essential part of setting up a strong regulator. It has to be part of the legislation."

Congress created the companies to inject money into the home-loan market, this keeping mortgage rates lower. The companies buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

Mudd and Syron sought to deflect criticism from Republicans abut the companies' operations and they defended the size of their portfolios. The executives also said their companies had made extensive changes and tightened internal controls.

Fannie Mae finances more mortgages than anyone else and is the second-largest financial institution after Citigroup Inc. Fannie Mae is facing a likely $11 billion restatement of earnings after regulators accused the company last fall of accounting manipulations. In June 2003, Freddie Mac was found to have misstated earnings by $5 billion for 2000-2002.

"It is a new day at Freddie Mac," Syron told the committee.

Mudd said he had "set some clear priorities to help us build a new Fannie Mae for the future -- one that Congress and the housing finance system can rely upon going forward."

New legislation would create a regulator with broad power over Fannie Mae and Freddie Mac and impose limits on their portfolio holdings. The proposal won the Bush administration's endorsement when Snow testified before the Senate committee two weeks ago.

Also, Federal Reserve Chairman Alan Greenspan has urged Congress to restrict the companies' holdings, warning that their large debt could imperil U.S. financial markets.

Mudd said Wednesday that Fannie Mae's mortgage portfolio "makes an important contribution to the liquidity and affordability of the U.S. mortgage market."

Fannie Mae "has drawn in billions of dollars from investors abroad to expand the availability and lower the cost of housing for low- and moderate-income Americans," Mudd said.

"It is not at all clear that those foreign investors would place their money in the U.S. housing market without the predictability and convenience provided by" debt issued by Fannie Mae and its smaller rival, Freddie Mac.

Syron said that while several of the legislative proposals appear "reasonable, taken together they may result in unintended negative consequences for the nation's housing finance system."

Copyright Associated Press

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