Greenspan hits Fannie Mae, Freddie Mac

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Federal Reserve Chairman Alan Greenspan yesterday took on the powerful housing industry, warning that the $2 trillion and growing debts being amassed by Fannie Mae and Freddie Mac pose a threat to the economy and taxpayers.

The two mortgage giants played a historically important role during the 1980s and 1990s by helping to create an investor market for mortgage-backed securities, enabling home buyers to enjoy lower interest rates and easier credit terms while contributing to record homeownership rates, Mr. Greenspan told the Senate banking committee.

But the government-sponsored enterprises, in their race to become Fortune 500 companies, have exploited their implicit federal guarantee by monopolizing the market for single-family mortgages in recent years, while rapidly expanding debts and assets in a way that threatens the stability of the financial system, he said.

"The Federal Reserve is concerned about the growth and the scale" of the enterprises' acquisition and debt activities, and recommends that they be capped by Congress to prevent a financial crisis in the future, he said.

"Preventive actions are required sooner, rather than later," he said, echoing warnings from the General Accounting Office and Congressional Budget Office.

While the enterprises were not large enough in past years to "create a potential significant problem" for the economy and taxpayers, "they will almost surely do so in years ahead unless some changes are made," he said.

Mr. Greenspan advocated strict regulation of the enterprises comparable to the strictures imposed on their competitors, big banks like Citicorp and Bank of America. Among other things, the banks are required to set aside substantial reserves to cover losses from loan delinquencies.

Fannie Mae and Freddie Mac, despite having unprecedented amounts of debt, are not required to keep reserves against losses, and the lack of regulatory burden has given them a substantial advantage over competitors, Mr. Greenspan said.

In addition, little of the benefit they receive from billions of dollars in implicit federal subsidies is passed on to homeowners in the form or lower interest rates, he said.