Greenspan urges Congress to limitlarge portfolios

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ASSOCIATED PRESS

Federal Reserve Chairman Alan Greenspan urged Congress yesterday 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," Mr. Greenspan told the Senate banking panel.

Fannie Mae is the No. 1 U.S. buyer of home mortgages, while rival Freddie Mac ranks as 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," Mr. Green-span said.

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.

"It is of upmost importance to enact legislation this year," said Sen. Elizabeth Dole, North Carolina Republican, a member of the Senate banking committee who helped write a bill tightening controls over the two mortgage companies. On the House side, Rep. Richard H. Baker, Louisiana Republican, chairman of a subcommittee that oversees Fannie Mae and Freddie Mac, proposed legislation that would strengthen the government's hand over them.

Shares of both companies rose amid the calls for tighter controls. Fannie Mae shares rose $1.87 to $54.15 on the New York Stock Exchange, while Freddie Mac shares gained $2.04 to $63.80. They are both well below their highs for the year, however.

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 (OFHEO), which has been investigating Fannie Mae's accounting since last year, told a House subcommittee yesterday that falsified signatures had been found in company ledgers from 1999 through 2002.

The OFHEO director, Armando Falcon, also said there were numerous instances in which company managers directed lower-level employees to alter database entries. Mr. Falcon said the agency has ordered Fannie Mae "to determine who falsified the signatures on journal entries."

Mr. Falcon, a Democrat appointed by President Clinton, told President Bush in a letter Tuesday that he will step down on May 20. He submitted his resignation two years ago but stayed on to deal with problems at the companies.

Mr. Greenspan's remarks about the two mortgage giants repeated a warning that the Fed chief has been issuing for more than a year: The country's financial system could be put at risk unless the growth of the two giant mortgage lenders is restrained.