Treasury would let Fannie, Freddie buy, bundle, unload jumbos

By Marcy Gordon
Associated Press
via Yahoo News
Wednesday, September 19, 2007

http://news.yahoo.com/s/ap/20070920/ap_on_bi_ge/paulson_mortgages;_ylt=A...

WASHINGTON -- Shifting course, Treasury Secretary Henry Paulson planned to tell Congress that the Bush administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities loans exceeding $417,000.

This change, which the Bush administration opposed in the summer, is portrayed as a way to inject liquidity into the stretched mortgage market.

Paulson said the change involving jumbo loans could occur only in tandem with tighter oversight of the two government-sponsored mortgage companies, according to a person familiar with the secretary's testimony prepared for a House hearing Thursday.

The person spoke on condition of anonymity because Paulson's testimony before the House Financial Services Committee had not been made public.

Paulson planned to tell lawmakers "there's little question" that allowing the companies to buy the large loan "would give a short-term lift" to the mortgage market.

At the same time, he was expected to urge passage of legislation to tighten federal oversight of the companies. "It would be unreasonable and irresponsible" to expand their business "without addressing the fundamental problems of their regulatory structure," the Treasury chief planned to say.

The companies now cannot buy or guarantee mortgages exceeding $417,000. Democrats say that letting them do so would help ease the mortgage-market turmoil because lower-cost loans guaranteed by the companies have proved relatively safe for investors during the crunch.

Federal Reserve Chairman Ben Bernanke this week told the committee's chairman, Rep. Barney Frank, that if Congress were to lift the limit for the two companies, it should act swiftly on a short-term change.

"If the Congress is inclined to move in this direction, it should consider whether such action could be taken in a way that makes the change explicitly temporary as well as promptly implemented," Bernanke wrote Frank, D-Mass., in a letter dated Monday.

Word of Paulson's position came on the same day that federal regulators raised the caps on the mortgage investment holdings of Fannie Mae and Freddie Mac in an effort to alleviate the strain in the mortgage market.

Democratic lawmakers have clamored for such a change for weeks, though the regulators' action — which allows Fannie Mae and Freddie Mac to take on about 2 percent more debt — did not go as far as they, or the companies, had hoped.

The Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, last month turned down Fannie Mae's request for a 10 percent lift of the cap on its investment holdings, now set at $727 billion.

The agency said Wednesday that Fannie Mae can increase its mortgage portfolio by 2 percent a year, or up to 0.5 percent per quarter, starting Oct. 1. The agency said it will set the portfolio cap for both companies at $735 billion. Freddie Mac's currently is at $724 billion.

On Tuesday, the Federal Reserve lowered interest rates for the first time in more than four years to bolster the economy. Also, the House approved a plan to expand backing of mortgages by the Federal Housing Administration as a way to help struggling homeowners avoid foreclosure.

The Senate Banking, Housing and Urban Affairs Committee approved similar legislation on Wednesday.

The House measure is Congress' first stand-alone bill passed in response to the mortgage-market tumult of the summer, which came amid a rising tide of defaults and foreclosures.

An estimated 2 million to 2.5 million adjustable-rate mortgages are scheduled to "reset" this year and next, jumping from low "teaser" rates for the first two or three years to much steeper rates that could cost borrowers their homes.

The turbulence in financial and credit markets resulting from the mortgage upheaval has raised the specter of a possible recession.

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