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Limiting Fannie Mae's and Freddie Mac's Portfolio Size, June 21, 2006 1 (June 21, 2006)

handle is hein.tera/crser0099 and id is 1 raw text is: Order Code RS22307 Updated June 21, 2006 CRS Report for Congress Received through the CRS Web Limiting Fannie Mae's and Freddie Mac's Portfolio Size N. Eric Weiss Analyst in Financial Institutions Government and Finance Division Summary One of the more controversial aspects of the Government Sponsored Enterprise (GSE) reform before Congress is the proposal to limit the size of Fannie Mae's and Freddie Mac's portfolio to reduce the risk to the federal government and the economy. In 2003, these GSEs' combined investment portfolio had risen to $1.6 trillion from $136 billion in 1990. These investment portfolios include mortgages and mortgage-backed securities (MBSs) 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. Proponents of portfolio limits argue that shrinking portfolio size reduces the likelihood and cost if this choice ever has to be made. 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. S. 190 and H.R. 1461 propose many changes in the rules governing the activities and regulation of Fannie Mae and Freddie Mac. S. 190 as ordered reported to the full Senate includes portfolio limits. H.R. 1461 does not. Fannie Mae signed a consent agreement on May 23, 2006, with the Office of Federal Housing Enterprise Oversight (OFHEO) agreeing to cap its retained mortgage related portfolio to its level on December 31, 2005 ($727 billion). OFHEO's Acting Director James B. Lockhart III is seeking a similar cap from Freddie Mac. In June 2006, the U.S. Treasury and Department of Housing and Urban Development (HUD) announced separate inquiries that could lead to restrictions on Fannie Mae's and Freddie Mac's ability to finance their mortgage-related portfolios. This report analyzes the advantages and disadvantages of proposals to limit portfolio size. It will be updated as warranted by significant developments. Congressional Research Service oe The Library of Congress

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