WASHINGTON — Federal Reserve Chairman Alan Greenspan urged Congress Wednesday to limit the size of the multibillion-dollar portfolios held by mortgage giants Fannie Mae and Freddie Mac, warning that simply creating a strong regulator would not suffice.
"World class regulation, by itself, may not be sufficient," Greenspan told the Senate Banking Committee.
Fannie Mae is the No. 1 U.S. buyer of home mortgages, while rival Freddie Mac ranks as the second-largest buyer.
A debate over the appropriate regulation of the two mortgage titans has taken on heightened scrutiny in the wake of accounting scandals at both Fannie Mae and Freddie Mac.
"Without restrictions on the size of (their) balance sheets, we put at risk our ability to preserve safe and sound financial markets in the United States, a key ingredient of support for homeownership," Greenspan said.
On Wall Street, Fannie Mae stock was up $1.34 at $53.62 and Freddie Mac was up 85 cents at $62.61.
Limiting the size of Fannie's and Freddie's portfolio holdings wouldn't affect mortgage rates for homeowners because so many big banks and other lenders compete with them in the home-loan market, Greenspan said, citing a study by the Federal Reserve.
Sen. Charles Schumer, D-N.Y., a member of the Senate banking panel, disputed that notion. "It almost defies belief that mortgage rates won't go up," he told Greenspan. "On this issue, we don't see eye to eye."
Prospects for passage of legislation appear stronger than in previous years, when the two politically influential companies successfully lobbied against new restraints. The Bush administration wants to see legislation enacted, though it has not endorsed a specific plan.
Congress created Fannie Mae and Freddie Mac to inject money into the home-loan market. They buy mortgages and bundle them into securities for sale to investors worldwide.
The director of the Office of Federal Housing Enterprise Oversight, which has been investigating Fannie Mae's accounting since last year, told a House subcommittee Wednesday that falsified signatures had been found in company ledgers from 1999 through 2002.
Greenspan's remarks about the two mortgage giants repeated a warning that the Fed chief has been issuing for more than a year: that the country's financial system could be put at risk unless the growth of the two giant mortgage lenders is restrained.