Fed chief urges tougher line on 2 mortgage giants

WASHINGTON - US FEDERAL Reserve chairman Ben Bernanke urged Congress to bolster regulation of mortgage groups Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.

His 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 Industrial Average suffered a gut-wrenching 416-point plunge. Wall Street on Tuesday staged a rebound, gaining more than 150 points.

Mr Bernanke has previously 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'.

The Fed chief's suggestion was contained in remarks delivered on Tuesday through satellite to a bankers' meeting in Hawaii.

Lenders to sub-prime 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 sub-prime mortgage market are spiking.

Against this backdrop, Mr Bernanke said he wanted to be clear that by suggesting the change in the portfolio holdings of Fannie Mae and Freddie Mac, he was not advocating a change in the exposure of the mortgage giants' sub-prime loans.

Last week, Freddie Mac announced that it would no longer buy certain risky, sub-prime mortgages. Fannie Mae is the biggest buyers of home mortgages in the United States; 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.

'Legislation to strengthen the regulation and supervision of GSEs is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them towards activities that provide important social benefits,' Mr Bernanke told the banking gathering.

He said the Fed would like to see legislation passed this year.

Representative Barney Frank, chairman of the House Financial Services Committee, is proposing legislation that would give the regulator of Fannie Mae and Freddie Mac the discretion to limit or reduce the two mortgage companies' holdings.

The combined portfolios of Fannie Mae and Freddie Mac from the end of 1990 until the end of 2003 have grown more than tenfold - to US$1.56 trillion (S$2.4 trillion), Mr Bernanke said.

Besides buying mortgage-backed securities, the mortgage giants purchase other types of assets for their own investment portfolios, he added.

But less than 30 per cent of their current portfolio holdings are oriented towards affordable housing, he said.

Mr Bernanke did not provide any fresh insight on the turmoil seen in worldwide financial markets over the past week in his speech or in a brief question-and-answer session that followed.

ASSOCIATED PRESS