Greenspan Builds Case Vs. Fannie, Freddie

May 20, 2005

Greenspan Builds Case for Limiting Fannie Mae, Freddie Mac Holdings, Says It Won't Hurt Housing

By Jeannine Aversa,
AP Economics Writer

WASHINGTON (AP) -- Federal Reserve Chairman Alan Greenspan again pushed for limits on the multibillion-dollar mortgage holdings of Fannie Mae and Freddie Mac, saying such restrictions would not hurt the thriving housing market.

Greenspan, who has been pressing Congress to limit the holdings of the two mortgage giants, warned on Thursday that their debt poses a risk to U.S. financial markets. As Fannie and Freddie grow ever larger, their ability "to quickly correct a misjudgment in their complex hedging strategies becomes more difficult," Greenspan said. "We are thus highly dependent on the risk managers at Fannie and Freddie to do everything right."

Greenspan's remarks, made to a housing conference in Atlanta, echoed similar comments he has made in the past and appeared to have no effect on the companies' stock prices. Shares of Fannie Mae rose 4 cents to close at $56.54 in Thursday trading on the New York Stock Exchange, while Freddie Mac's shares rose 52 cents to $64.85.

Congress is exploring various proposals to rein in Fannie Mae, the No. 1 U.S. buyer of home mortgages, and its rival, Freddie Mac, which ranks as the second-largest buyer. They were created by Congress to inject money into the home-loan market. Fannie Mae and Freddie Mac buy mortgages and bundle them into securities for sale to investors worldwide.

At the end of 1990, Fannie's and Freddie's combined portfolios amounted to $132 billion, Greenspan said. By 2003, their combined holdings came to $1.5 trillion.

"The assets required for Fannie and Freddie to achieve their mission are but a small fraction of the current level of their assets," Greenspan said. Thus if Congress were to limit the two companies' holdings so that they can achieve their mission, a substantial liquidation would be required over time, the Fed chief said.

He said this could be done fairly smoothly, without disruptions to the housing market. "The implementation of portfolio limits should pose no significant difficulties," Greenspan said.

Unwinding some of Fannie's and Freddie's holdings would not raise mortgage rates for homeowners because so many big banks and other lenders compete with them in the home-loan market, he said.

Greenspan said the Fed also sees little evidence to support the notion that the availability of fixed-rate mortgages is tied to the size of Fannie's and Freddie's portfolios. He also said it is "difficult to see" how the two companies' portfolios can influence home ownership.

Much of the increase in home ownership seen in recent years seems to be due to growing incomes of households and generally low borrowing costs, he said.

"Without the needed restrictions on the size of (Fannie's and Freddie's) balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for housing," he said.

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, which partly involved how derivatives were accounted for, led to the ouster of the company's chief executive and top financial officer.

Freddie Mac had its own accounting debacle in 2003, which also involved how derivatives were accounted for, and three top executives were forced out. It had misstated earnings by $5 billion for 2000-2002.

Copyright Associated Press

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