WASHINGTON -
Easing investment limits on Fannie Mae and Freddie Mac to bolster the distressed mortgage market would not pose a risk for the U.S. financial system, Democratic lawmakers promoting the idea say.
Even if the two government-sponsored mortgage giants had greater exposure to the troubles afflicting traditional lenders, the losses Fannie and Freddie might face would not be nearly big enough to prompt a government bailout, according to these lawmakers.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee and an advocate for lifting the investment restrictions on Fannie and Freddie, said in an interview Wednesday "there is a greater danger of the portfolio being too limited than of it being too big."
Fannie and Freddie, which were created by Congress in 1938 and 1970, respectively, are able to pump money into the $8 trillion home-loan market by buying mortgages from lenders and then bundling them into securities for sale on Wall Street.
Shares of Fannie and Freddie, which finance or guarantee more than 75 percent of all home mortgages, have soared in recent days on speculation that federal regulators will raise the amount of mortgage securities the companies are allowed to hold as investments. The goal would be to loosen the credit crunch prompted by surging mortgage defaults and foreclosures by injecting more cash into the market.
Although the two companies are required by regulators to hold tens of millions of dollars in reserves, it is widely assumed on Wall Street that should either one get into financial trouble, Congress would authorize a bailout - even though the bonds Fannie and Freddie issue explicitly state they are not backed by the federal government.
Indeed, it is that marketplace perception, experts say, that has been driving investors who buy mortgage-backed securities away from loans that aren't guaranteed by Fannie or Freddie.
Sen. Charles Schumer, D-N.Y., who heads Congress' Joint Economic Committee, has urged the director of the Office of Federal Housing Enterprise Oversight to consider temporarily raising the limits on the mortgage portfolios of Fannie and Freddie - now at around $727 billion and $724 billion, respectively - "to allow them to perform their critical role as a market stabilizer."
Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, also believes increasing the limits may be a good idea.
Kim Magee, a spokeswoman for Schumer, said the senator could not foresee any financial problems for Fannie and Freddie that would be large enough to necessitate a government bailout.
Critics of the companies, including a number of administration policymakers, Republican lawmakers and Federal Reserve Chairman Ben Bernanke, have warned they could pose a threat to the U.S. financial system if their ability to assume new debt was not restrained.
For example, if the marketplace perception that the U.S. government would ultimately bail out Fannie and Freddie eroded, investors from around the globe could become less willing to lend money cheaply to them. That, in turn, might pump fewer dollars into the home mortgage market, putting upward pressure on interest rates.
