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VOL. 122 | NO. 195 | Monday, October 15, 2007

Democrats Compromise On Increase In Portfolio Caps

By ALAN ZIBEL | AP Business Writer

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WASHINGTON (AP) - Congressional Democrats have reached a compromise on allowing two government-sponsored mortgage companies to increase their debt holdings in an effort to help financially struggling homeowners.

House and Senate lawmakers said late last week they will support legislation that permits Fannie Mae and Freddie Mac to increase holdings of mortgages by $74 billion each, or 10 percent above current limits of $735 billion - for six months.

However, the Office of Federal Housing Enterprise Oversight, which independently regulates the companies, and the Bush Administration reject the proposal. In a telephone interview, OFHEO Director James B. Lockhart said Fannie and Freddie don't need higher portfolio caps because the companies already have the financial flexibility to help a housing market buffeted by soaring foreclosure and default rates.

That's not the view of Democrats who would require 85 percent of the total $147 billion increase, or $125 billion, in debt added to the companies' portfolios be directed at helping borrowers with weak, or subprime, credit refinance loans due to reset at sharply higher rates. Democrats say if Fannie and Freddie increase their purchases of mortgages from banks, those banks can in turn make more credit available to financially strapped homeowners.

Sen. Charles Schumer, D-N.Y., said in a statement Thursday that he plans to attach the proposal to the "first available" bill headed for a Senate vote. A companion bill by Rep. Barney Frank, D-Mass., could be introduced as soon as Friday, a spokesman said.

In an e-mailed statement, Frank said the short-term increase would be "responsive to the immediate needs to help people avoid the foreclosures that will result if prepayment penalties keep them locked in to adjustable-rate mortgages that will rise steeply" in the coming months.

Frank, the chairman of the House Financial Services Committee, had sided with the White House and OFHEO in the past, saying that Fannie and Freddie shouldn't be permitted to increase mortgage holdings without undergoing a comprehensive regulatory overhaul after multibillion-dollar accounting scandals. However, earlier this month, Frank said in a statement that a six-month increase would end quickly enough not to be an obstacle to broader reform, which the Bush administration also wants.

In August, OFHEO rejected Fannie's request for a 10 percent lift of the cap. However, last month, as the housing crisis worsened, regulators said Fannie and Freddie could increase debt holdings to a total $1.5 trillion and then by 2 percent annually.

Still, regulators are keeping a close watch on the activities of the companies, which have not yet returned to a routine schedule of filing financial results because of the accounting problems.

Lockhart pointed out Thursday that portfolio limits do not apply to mortgage-backed securities, pools of mortgages bought and sold by Fannie and Freddie.

"We're not standing in their way" if they want to help troubled homeowners, Lockhart said, pointing to a rebound in the mortgage-backed market, which had seized up earlier this year amid a collapsing housing market. Fannie and Freddie are selling almost $100 billion a month in mortgage-backed securities, Lockhart said.

Treasury Department spokeswoman Jennifer Zuccarelli said raising portfolio limits for the companies should be left to OFHEO, "unbound from the political process."

Fannie Mae shares fell 45 cents to close at $65.95, while Freddie Mac shares rose 39 cents to $61.17 in after-hours trading and ended the day down $1.27 to close at $60.78.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

PROPERTY SALES 97 418 8,253
MORTGAGES 112 508 9,293
BUILDING PERMITS 194 1,059 18,126
BANKRUPTCIES 46 208 5,367