Fannie Mae and Freddie Mac: Proposals to Regulate Their Mortgage Portfolio Size in the 110th Congress Page: 2 of 13
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Fannie Mae and Freddie Mac: Proposals to Regulate
Their Mortgage Portfolio Size in the 110th Congress
Rising interest rates and interest rate resets on subprime adjustable rate
mortgages combined with stagnant or falling home prices threaten increasing
numbers of homeowners with foreclosure. Members of Congress have responded to
this situation by proposing legislation that would use the congressionally chartered,
stockholder-owned government-sponsored enterprises (GSEs), Fannie Mae and
Freddie Mac, to prod the market to provide more affordable mortgages. The GSEs
have retained mortgage portfolios with a combined value of $1.4 trillion. In the 110th
Congress, H.R. 1427 and S. 1100 propose changes in the rules governing the
activities and regulation of Fannie Mae and Freddie Mac. H.R. 3777, H.R. 3838, S.
2169, and S. 2346, 110th Congress, focus on allowing the GSEs to increase their
retained mortgage portfolios. S. 2036 is similar, but would also increase the
maximum size of a mortgage that the GSEs can purchase.
The GSEs agreed to restrictions on their retained portfolios in 2006, following
discovery of accounting and management problems. In 2007, the Office of Federal
Housing Enterprise Oversight (OFHEO) denied requests from both Fannie and
Freddie to raise or eliminate the caps.
The GSEs' portfolios include mortgages and mortgage-backed securities (MBS)
that are subject to several types of financial risk. If these risks are not managed
properly, or if market movements turn dramatically against the GSEs, the
government may face two unsatisfactory alternatives: either let the GSE go into
default and hope that the financial repercussions can be controlled, or step in and
assume payments on the GSE debt at a significant cost to taxpayers. The GSEs and
their supporters argue, on the other hand, that the profits generated by the investment
portfolios enhance the GSEs' ability to support affordable housing programs and
reduce mortgage interest rates.
Proponents of raising the portfolio limits or the $417,000 conforming loan limit
believe that the GSEs could bring more capital to these mortgage market segments
and compensate for what many analysts see as a sudden increase in the interest rate
premium charge for more risky loans.
This report analyzes the advantages and disadvantages of proposals to limit
portfolio size. It will be updated as warranted by significant developments.
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Fannie Mae and Freddie Mac: Proposals to Regulate Their Mortgage Portfolio Size in the 110th Congress, report, March 4, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc807922/m1/2/: accessed January 22, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.