Senators nudge Fannie, Freddie

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ASSOCIATED PRESS

Senators yesterday said Fannie Mae and Freddie Mac should do more to help struggling homeowners — an expanded role that might win them looser capital restraints.

Amid the worst housing crisis in a generation, pressures are mounting for an expanded role by the two mortgage finance companies, even as lawmakers also call for a tightening of the reins on them in the wake of multibillion-dollar accounting scandals.

At a hearing of the Senate Banking, Housing and Urban Affairs Committee, its chairman, Sen. Christopher J. Dodd, Connecticut Democrat, said the two companies should do more to help homeowners with high-priced loans refinance into more-affordable mortgages. Lenders also stand to benefit from the fees generated by this increased activity.

The economic-stimulus package passed by the Senate yesterday includes a provision raising for one year the mortgage cap Fannie and Freddie can buy in high-cost areas, from $417,000 up to $729,750, a move intended to stimulate new loans and refinancing activity in markets such as California and the Northeast.

The proposal raised red flags among some Republican senators, who said it would drain large amounts of capital from Fannie and Freddie that could otherwise go into lower-priced mortgages. Raising the cap, they warned, to include so-called "jumbo" mortgages, just raises the potential for bigger losses.

And since half of the affected mortgages are in California, the risk would be "very concentrated," said James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight — the agency that oversees Fannie and Freddie.

Mr. Lockhart told the panel the loan cap should not be raised without also providing stricter government regulation of the companies.

But Mr. Dodd insisted, "We're in a major economic crisis. ... We've got to act."

In return for allowing Fannie and Freddie to buy the higher-priced mortgages, Sen. Charles E. Schumer, New York Democrat, said the companies should agree to refinance more troubled lower-income borrowers.

In addition, Mr. Dodd and Mr. Schumer floated a new idea: The 30 percent cushion of extra capital that Fannie and Freddie are required to hold by the regulatory agency — representing nearly $20 billion between the two — could be reduced and some of the freed-up funds directed toward buying the mortgages of struggling borrowers.

Mr. Lockhart said it's too soon to deflate that cushion. "We need to be very careful," he said.

The companies appear to be chafing under the requirement.

"Permanently higher capital without regard to risk could have a significant market impact, particularly in times of economic strain," Freddie Mac Chairman and CEO Richard F. Syron testified.

Fannie and Freddie's losses from high-risk subprime mortgages are much smaller than those of most banks, yet they are required to hold similar levels of capital as a reserve against risk, Mr. Syron said.

Mr. Dodd said the committee is poised to write legislation that would tighten the government's reins on Fannie and Freddie, giving a new regulator authority to limit their multitrillion-dollar mortgage holdings. A bill dictating that passed the House last spring but the Senate has not yet acted.

Mr. Syron and Fannie Mae President and CEO Daniel H. Mudd voiced support for a stronger regulatory regime at the hearing.

The two companies were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. Together they hold or guarantee about $4.9 trillion in home-mortgage debt.