WHAT HAPPENED: Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.
MORE SPECIFIC: Bernanke has supported efforts to pare the two mortgage companies’ huge portfolios. This time, however, he was a bit more specific and recommended that their holdings might be linked to a “measurable public purpose, such as the promotion of affordable housing.”
BACKGROUND: Bernanke’s remarks come as worries about risky mortgages are making investors jittery. Those fears contributed to last week’s worldwide stock meltdown, where the Dow Jones industrials suffered a gut-wrenching 416-point plunge.
TAKING A LICKING: Lenders to subprime borrowers — people with blemished credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up with their mortgage payments. Delinquencies and foreclosures in the subprime mortgage market are spiking.
FANNIE MAE, FREDDIE MAC PRIMER: Fannie Mae is the No. 1 U.S. buyer of home mortgages; its rival, Freddie Mac, ranks as the second-largest buyer. Fannie Mae and Freddie Mac — also referred to as government-sponsored enterprises, or GSEs, — were created by Congress to inject money into the mortgage market by buying home loans from banks and other lenders. They bundle the mortgages into securities for sale on Wall Street. Both companies have been scarred by accounting scandals.
PORTFOLIOS SWELL: Fannie Mae’s and Freddie Mac’s combined portfolios from the end of 1990 until the end of 2003 have grown more than tenfold — to $1.56 trillion, Bernanke said. Besides buying mortgage-backed securities, the mortgage giants purchase other types of assets for their own investment portfolios, Bernanke said.
WHAT THEY LACK: Less than 30 percent of their current portfolio holdings are oriented toward affordable housing, Bernanke said.
PAST EFFORTS: On Capitol Hill, various efforts over the past several years to tighten the government’s reins on Fannie Mae and Freddie Mac have ultimately languished. However, prospects for compromise legislation have improved with the Democrats now in control of Congress.
LOOKING AHEAD: Bernanke did not talk about the course of interest rates in the United States. Many economists predict the Fed will hold rates steady when it meets later this month.