Greenspan warns on mortgage reform

In testimony before the Senate Banking Committee on Wednesday, U.S. Federal Reserve Chairman Alan Greenspan urged Congress to enact stronger regulation for the Fannie Mae and Freddie Mac mortgage finance companies.

The reason is to limit and lessen risks to the United States financial system. But even stronger regulation, Greenspan warned, would not be enough to remove the threat that failure of one of the companies would require a government bailout.

The solution to this risk, Greenspan said, was to limit the portfolios of assets held by the two government-sponsored enterprises (GSEs).

Fannie Mae and Freddie Mac are the biggest and second biggest buyers of home mortgages in the U.S. They were created by Congress to bring more money into the U.S. home-loan market.

Currently, the portfolios of the two companies together total $1.5 trillion; Greenspan has proposed that the portfolio of each company be limited to $200 billion.

He insists that limiting their portfolios would not raise mortgage rates.

Greenspan admitted that more and stricter regulation could boost perception of GSEs like the two mortgage companies as arms of the government, but he insisted that if these measures were not taken, risks of financial crisis were much higher.

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