Greenspan warns of mortgage firms' debt

WASHINGTON — Federal Reserve Chairman Alan Greenspan urged Congress on Wednesday to restrict the multibillion-dollar holdings of the mortgage companies Fannie Mae and Freddie Mac, warning that their huge debt could imperil U.S. financial markets.

His admonition lent support to an effort in Congress to tighten controls on the two government-sponsored companies following their accounting scandals. Even so, shares of the companies rose in trading Wednesday.

The Fed chairman told the Senate Banking, Housing and Urban Affairs Committee that it might not be enough to just create a strong regulator for the companies, which hold or guarantee more than 45 percent of all mortgage loans in the country.

Legislation recently proposed would set up a regulatory agency with the power to compel the companies to sell off any assets deemed not to be in line with their mission of making homeownership more widely available.

The measures would not have Congress set binding limits on the size of the companies' portfolios, which together have grown to $1.5 trillion. They also have issued $1.8 trillion in debt.

"World-class regulation, by itself, may not be sufficient," Greenspan testified. "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," he said.

Portfolio restrictions would not affect mortgage rates for homeowners because so many big banks and other lenders compete with Fannie Mae and Freddie Mac, Greenspan said, citing a Fed study.

Fannie Mae stock rose $1.87 to close at $54.15 a share Wednesday on the New York Stock Exchange, while Freddie Mac's climbed $2.04 to $63.80.

Wall Street analysts said a legislative proposal unveiled Tuesday to rein in the companies was less stringent than the market originally feared. Some stock traders said they believe it's unlikely that restraints on the size of the companies' holdings will become law.

While the companies' stock prices had fallen as a result of the accounting turmoil, Greenspan noted that "mortgage markets have functioned well."

One committee member, Sen. Charles Schumer, disputed that notion. "It almost defies belief that mortgage rates won't go up," Schumer, D-N.Y., told Greenspan. "On this issue, we don't see eye to eye."

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.