Greenspan Urges Stricter Regulation of Fannie Mae, Freddie Mac

With the Fannie Mae and Freddie Mac's chief regulator acknowledging it could take years to straighten out accounting problems at Fannie Mae, Federal Reserve Chairman Alan Greenspan is now calling for strict limits on the companies' $1.5 trillion in holdings, the New York Times reported.

Greenspan testified Tuesday before the Senate Banking Committee, taking issue with the enormous portfolios held by the two companies, which represent nearly a quarter of the home-mortgage market. Greenspan says the vast portfolios represent significant risk to the nation's financial system if either company faces dire problems, the Times reported.

The majority of the assets in the companies' portfolios are mortgage-backed securities, which Greenspan said these assets are only good to increase earnings and do not further the companies' mission of providing liquidity and lowering mortgage interest rates.

"We at the Federal Reserve remain concerned about the growth and magnitude of the mortgage portfolios of the Government Sponsored Enterprises, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks,” Greenspan said.

"To fend off possible future systemic difficulties, which we assess as likely if G.S.E. expansion continues unabated, preventive actions are required sooner rather than later."

In light of recent accounting problems at both problems at both companies, some in Congress believe the time is finally right to
approve legislation requiring stronger oversight of the companies, legislation that has failed in recent years due to the strong lobbying efforts by both companies.

Senator Charles E. Schumer, D-NY, criticized Greenspan's recommendation and called it both inconsistent with his other views on regulation and potentially damaging to the housing markets.

Armando Falcon Jr., head of the Office of Federal Housing Enterprise Oversight-which oversees both companies-gave a House panel further details of new accounting problems that Fannie Mae executives had disclosed last month. Falcon announced on Tuesday that he would step down next month, the Times reported.

He said that the company appeared to have improperly recorded some pooled mortgage loans and improperly employed so-called "special purpose entities," corporate vehicles used to move the company's assets and liabilities off the books, to issue mortgage-backed securities. He said officials had instructed the company to determine which employees might have falsified entries in some journals, the Times reported.

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