Restraint urged for Fannie Mae, Freddie Mac

WASHINGTON — Treasury Secretary John Snow urged Congress to restrain Fannie Mae and Freddie Mac, giving the Bush administration's blessing to efforts to create a new regulator with broad power over the huge mortgage companies.

Recent accounting scandals at the two biggest U.S. buyers of home mortgages — expected to result in an $11 billion restatement of earnings in No. 1 Fannie Mae's case — have heightened the administration's concern that they pose a potential risk to U.S. financial markets if they fail, Snow told the Senate Banking Committee on Thursday.

With a legislative push under way, driven by Republicans in Congress, to strengthen the government's hand over the two companies, Snow's comments opened a partisan breach among senators and provoked a sharp reaction from some Democrats.

Because so many big financial institutions hold large amounts of the $1.8 trillion in debt issued by Fannie Mae and Freddie Mac, a crisis at or failure of either could ripple through the markets, he said. Congress created the two companies to inject money into the home-loan market, keeping mortgage rates lower. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.

Snow's remarks came a day after Federal Reserve Chairman Alan Greenspan, appearing before the same Senate panel, called for Congress to limit the combined $1.5 trillion portfolios of the government-sponsored companies.

The recent troubles at Fannie Mae and Freddie Mac "reinforce concerns over the systemic risks posed" by the companies, Snow said. He said the problems further highlight the need for a new regulatory regime "to ensure that our housing finance system remains a strong and vibrant source of funding" for home buyers.

The statements by Greenspan and Snow lent support to a new effort by Republican lawmakers to tighten controls on Fannie Mae and Freddie Mac, 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 remarks by President Bush's top economic official brought a rebuke from Sen. Charles Schumer, D-N.Y., who accused the administration of trying to "virtually eliminate" Fannie Mae and Freddie Mac and using their recent accounting lapses as a pretext for doing so.

With the housing market functioning so robustly as an engine for economic growth, Schumer asked Snow, "Why are we radically changing" the two companies?