Greenspan: Curb Fannie, Freddie Growth

Reuters-Greenspan: Curb Fannie, Freddie Growth:

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Greenspan Calls For GSE Curbs
By Mark Felsenthal

WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan on Tuesday urged Congress to rein in Fannie Mae and Freddie Mac, warning that unchecked growth in the housing finance giants will likely threaten the U.S. financial system.

'Most of the concerns associated with systemic risks flow from the size of the balance sheets that these GSEs (government-sponsored enterprises) maintain,' Greenspan told the Senate Banking Committee.

'GSEs need to be limited in the issuance of GSE debt and in the purchase of assets, both mortgages and non-mortgages, that they hold,' he added, implying the size of their holdings and the need to keep growing made them vulnerable.

He also called for clarity in the government's backing for the companies -- which are shareholder-owned but congressionally chartered -- saying the current ambiguity had the potential to cause a 'very serious' financial problem.

Fannie Mae's (FNM.N: Quote, Profile, Research) and Freddie Mac's (FRE.N: Quote, Profile, Research) debt is not backed by the government. But advantages through their charters, including multibillion-dollar emergency credit lines, foster a perception the government would rescue them if necessary.

Greenspan's testimony comes as Congress works to create a new regulator for the two mortgage finance giants and 12 Federal Home Loan Banks, after problems including an accounting scandal at Freddie Mac.

He noted the two companies 'collectively dominate the financing of residential housing in the United States' and stand behind more than $4 trillion of mortgages.

He said 'the most crucial issue' for lawmakers as they assess how to tighten their regulation is the potential threat they pose for economic stability."