Tracking the FED

Today's article follows release of a letter from Chairman Bernanke to Senator Shumer regarding the state of readiness of the FED to act as appropriate.


Bernanke Says Fannie, Freddie Asset Caps Should Stand (Update3)
By James Tyson
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Aug. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said relaxing portfolio limits on Fannie Mae and Freddie Mac isn't necessary for the two largest U.S. mortgage finance companies to help stem a surge in foreclosures.

Federal caps on the companies' combined $1.4 trillion in mortgages and mortgage bonds ``need not be lifted to allow them to accommodate new borrowers,'' Bernanke said in an Aug. 27 letter to Senator Charles Schumer, a New York Democrat.

Bernanke's view is in line with the companies' regulator and with President George W. Bush. The Office of Federal Housing Enterprise Oversight on Aug. 10 rejected requests to allow the government-chartered firms to buy more home loans to ease a credit crunch in the mortgage market. Schumer and other Democrats have called for relaxing the restrictions, saying the companies could fill a gap left by investors who fled the market.

Ofheo, as the regulator is known, imposed the limits last year after Fannie Mae and Freddie Mac disclosed accounting misstatements of $11.3 billion. To lift the ceilings, the companies must complete an overhaul of accounting and governance and restore timely financial reporting, the agency said.

The constraints ``were imposed for safety and soundness reasons,'' Bernanke said. ``Policy makers may also want to encourage'' Fannie Mae and Freddie Mac to package and guarantee more home loans as securities for sale to investors, a business line that is ``not constrained by their portfolio caps.''

`Closely Monitoring'

The Fed chief also said that the central bank ``is closely monitoring developments in financial markets.'' He noted that the interest-rate setting Federal Open Market Committee said in a statement it ``is prepared to act as needed to mitigate the adverse effects on the economy'' from the turmoil in markets.

Created by Congress to increase financing for home loans, Fannie Mae and Freddie Mac own or guarantee 40 percent of the $10.9 trillion U.S. residential mortgage market. They profit by holding mortgages and mortgage-backed securities as investments and by charging a fee to guarantee and pool together home loans as bonds.

The companies ``should be encouraged to provide products for subprime borrowers to the extent permitted by their'' federal charters, Bernanke said without elaboration.
The Fed and U.S. Treasury since 2005 have portrayed the assets of Fannie Mae and Freddie Mac more as a threat to market stability than as a lifeline in times of declining mortgage credit.
The two companies could trigger financial market turmoil should they fail to hedge their holdings against interest rate changes and other risks, the Fed and Treasury have said. They have called on Congress to mitigate the ``systemic risk'' by creating a supervisor with power to pare the companies' assets.

Strengthened Oversight

Bush said Aug. 9 that Congress must pass legislation strengthening oversight of the companies before the administration lifts the restrictions on the portfolios.
Fannie Mae rose $2.19 to $65.76 at 4:20 p.m. in New York Stock Exchange composite trading, while Freddie Mac gained $2.05 to $63.25. Shares of both companies pared gains after Schumer released the letter, before resuming their advance.
Fannie Mae must restrict its portfolio to $727.2 billion, the level on Dec. 31, 2005, while Freddie Mac must constrain annual growth of its $720.6 billion portfolio to 2 percent. The two also can't buy mortgages of more than $417,000 for a single- family home in most states.

To contact the reporter on this story: James Tyson in Washington at jtyson@bloomberg.net
Last Updated: August 29, 2007 17:28 EDT