Regulators cautious on housing fix

The top two U.S. economic policymakers told a House panel on Thursday that allowing the biggest home finance companies to buy larger loans could ease mortgage market strains but the move should be coupled with tighter regulation of the firms.

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. dropped some of their resistance to expanding the role of Fannie Mae and Freddie Mac and said the companies could help restore funding for the largest home loans, which has dried up.

Paulson told the House Financial Services Committee that he could support letting the two government-sponsored enterprises, or GSEs, temporarily invest in so-called jumbo loans, or those above their current $417,000 limit, as part of a broader regulatory overhaul.

“There is little question that allowing the GSEs to securitize jumbo mortgages would give a short-term lift, which would be helpful to a segment of the housing market,” he said.

Rising defaults on sub-prime mortgages that had been extended to risky U.S. borrowers have set off a global chain reaction of tightening credit, and jumbo mortgages, even to prime borrowers, have been among the casualties.

The Fed responded to the turmoil aggressively Tuesday by lowering its benchmark interest rate by half a point to protect the economy from a housing slump that looks to deepen.

The chief executives of Fannie Mae and Freddie Mac, which have the support of numerous congressional allies, also appeared before the committee and repeated their calls for more freedom to invest in jumbo loans.

Rates on new jumbo mortgages have risen sharply in recent weeks as lenders have found few investors willing to take them off their hands.

Paulson made clear that he would not want the companies to hold the new investments in their portfolios, already at a combined $1.4 trillion, but would be open to having the GSEs repackage those loans for sale to investors.

Fannie and Freddie’s regulator, the Office of Federal Housing Enterprise Oversight, on Wednesday loosened some limits on the companies’ investment holdings in the hope they could do more to provide liquidity in the sub-prime market.

Rep. Barney Frank (D-Mass.), chairman of the House panel, said that the regulator’s action “was not a sufficient response” and that constraints should be relaxed further.

Frank and the companies’ other supporters on Capitol Hill have suggested that lifting the cap on GSE investment holdings and raising the loan limit size could ease market strains.

Bernanke warned the House panel that it would be too risky to let Fannie and Freddie use their investment portfolios to sop up more sub-prime mortgages.

“I don’t think that the portfolios are the most productive way forward in terms of addressing the current housing situation,” the Fed chief said.

He also cautioned that lifting the companies’ loan limit could expose investors and the GSEs to greater risk and urged limits on such a move.

“If it is done . . . it needs to be temporary, and if it’s not prompt, it’s not going to be productive because these markets will recover over the next few months,” Bernanke said. “If this comes online in March, it’ll be counterproductive.”

Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron used their testimony to issue a fresh appeal to their regulator to lift the cap on their investments.

“We believe having the flexibility to increase our portfolio by at least 10% would make a meaningful difference,” Mudd said.