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Summary:
Rising interest rates and interest rate resets on subprime adjustable rate mortgages combined with stagnant or falling home prices threaten increasing numbers of homeowners with foreclosure. Members of Congress have responded to this situation by proposing legislation that would use the congressionally chartered, stockholder-owned government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to prod the market to provide more affordable mortgages. The GSEs have retained mortgage portfolios with a combined value of $1.4 trillion. In the 110th Congress, H.R. 1427 and S. 1100 propose changes in the rules governing the activities and regulation of Fannie Mae and Freddie Mac. H.R. 3777, H.R. 3838, and S. 2169, 110th Congress, focus on allowing the GSEs to increase their retained mortgage portfolios. S. 2036 is similar, but would also increase the maximum size of a mortgage that the GSEs can purchase. The GSEs agreed to restrictions on their retained portfolios in 2006, following discovery of accounting and management problems. In 2007, the Office of Federal Housing Enterprise Oversight (OFHEO) denied requests from both Fannie and Freddie to raise or eliminate the caps. The GSEs' portfolios include mortgages and mortgage-backed securities (MBS) that are subject to several types of financial risk. If these risks are not managed properly, or if market movements turn dramatically against the GSEs, the government may face two unsatisfactory alternatives: either let the GSE go into default and hope that the financial repercussions can be controlled, or step in and assume payments on the GSE debt at a significant cost to taxpayers. The GSEs and their supporters argue, on the other hand, that the profits generated by the investment portfolios enhance the GSEs' ability to support affordable housing programs and reduce mortgage interest rates. Proponents of raising the portfolio limits or the $417,000 conforming loan limit believe that the GSEs could bring more capital to these mortgage market segments and compensate for what many analysts see as a sudden increase in the interest rate premium charge for more risky loans. This report analyzes the advantages and disadvantages of proposals to limit portfolio size. It will be updated as warranted by significant developments.
