WASHINGTON -- Federal Reserve chairman Alan Greenspan yesterday urged Congress to restrict the multibillion-dollar holdings of the mortgage companies Fannie Mae and Freddie Mac, warning their huge debt could imperil US financial markets. His admonition lent support to an effort to tighten controls on the government-sponsored companies, following accounting scandals.
The Fed chairman told a Senate committee it might not be enough just to create a strong regulator for the companies, which hold or guarantee more than 45 percent of all US mortgage loans.
Proposed legislation would set up a regulatory agency with power to compel the companies to sell any assets deemed not to be in line with their mission of making homeownership more widely available. The measures would not limit the size of the companies' portfolios, which together have grown to $1.5 trillion. They also have issued $1.8 trillion in debt.
''Without restrictions on the size of [their] 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 homeownership," Greenspan said. Portfolio restrictions would not affect mortgage rates, because so many big banks and other lenders compete with Fannie Mae and Freddie Mac, he said.
While the companies' stock prices have fallen as a result of the accounting turmoil, Greenspan said that ''mortgage markets have functioned well." Senator Charles Schumer, disputed that notion. ''It almost defies belief that mortgage rates won't go up," said Schumer, a New York Democrat.
Congress created the companies to inject money into the home-loan market, keeping mortgage rates lower. The companies buy mortgages from banks and bundle the loans into securities for sale to investors worldwide.
Regulators last year accused Fannie Mae of manipulating earnings to meet Wall Street targets. The Securities and Exchange Commission ordered the company to restate earnings back to 2001, a correction that could reach $11 billion. In 2003, Freddie Mac was found to have misstated earnings by $5 billion for 2000-2002.