The chairman of the influential Senate Banking Committee is urging regulators to consider lifting caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac.

In a statement issued Tuesday, Sen. Christopher Dodd, D-Conn., said Fannie’s and Freddie’s role of helping provide credit to low- and middle-income borrowers is “particularly important,” given the ongoing contraction in the flow of mortgage credit.

“For that reason, it may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie’s mortgage portfolio,” Dodd said.

Caps on the lending portfolios of the government-sponsored entities, or GSEs, were put in place in the wake of accounting and management scandals at both companies. Regulators at the Office of Federal Housing Enterprise Oversight (OFHEO) have continued to push for tight controls on Fannie and Freddie’s portfolios, saying the lenders pose a “systemic risk” to financial markets.

Under the terms of a May 2006 consent order, Fannie’s mortgage portfolio assets are capped at year-end 2005 levels, or $727.7 billion. Freddie Mac has voluntarily limited growth in its mortgage loan portfolio to one-half percent per quarter from a mid-2006 baseline of $710.3 billion until it resumes regular financial reporting.

Fannie has reportedly asked OFHEO to consider lifting restrictions on its lending portfolio. Fannie Mae and OFHEO would not comment on the reports.

The House passed legislation in May that would overhaul oversight of Fannie and Freddie, giving a new independent regulator limited authority to set limits on the GSEs’ portfolios. A Senate version of the bill awaits a hearing date before the Banking Committee.

Disagreements over portfolio caps prevented the Senate from passing a GSE reform bill last year. While backers of the GSEs say they reduce the cost of borrowing for average Americans, critics dispute such claims.

Others say Fannie and Freddie helped subprime lenders make questionable loans by buying securities backed by such loans. The GSEs held about $322 billion in the AAA tranches of private-label mortgage-backed securities at the end of 2006, including about $170 billion backed by subprime loans.

Dodd said any increase in the GSEs’ portfolio caps “would have to be used only to purchase loans made consistent with the highest standards of consumer protection. The GSEs should not be used to bring liquidity to loans with abusive terms.”

Dodd also called on Congress to pass legislation modernizing Federal Housing Administration’s loan guarantee programs so more people can access them.

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