Echoing statements by President Bush, federal regulators said Friday they aren’t ready to lift caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac.

The government-sponsored entities, or GSEs, haven’t finished fixing problems uncovered by accounting and management scandals, regulators said, and raising caps on Fannie and Freddie’s portfolios would provide little relief for subprime and Alt-A borrowers for whom loans have grown scarce.

Democratic Senators Christopher Dodd and Charles Schumer are among lawmakers who have urged the Office of Federal Housing Enterprise Oversight (OFHEO) to give the government-sponsored mortgage repurchasers more leeway to buy up loans on the secondary market.

Backers of the idea say that by buying up more mortgages, Fannie and Freddie could provide lenders with badly needed cash to make more loans at a time when rising delinquencies and defaults have scared many private investors away from investments backed by mortgage loans.

Fannie Mae Chief Executive Officer Daniel Mudd had also asked OFHEO to raise the cap on Fannie’s portfolio by 10 percent. 

In a letter faxed to Schumer’s office Friday, OFHEO Director James Lockhart said regulators still have “significant supervisory concerns” about the GSEs’ operations and are unwilling to raise the caps.

Fannie’s mortgage portfolio assets were capped at year-end 2005 levels, or $727.7 billion, under the terms of a May 2006 consent order that included a $400 million fine, Lockhart noted in the letter. The consent order followed OFHEO’s determination that the mortgage purchaser had “very significant operational, financial reporting, systems and risk management problems.”

Freddie Mac agreed to limit growth in its portfolio to 0.5 percent per quarter from a mid-2006 baseline of $710.3 billion until it resumes regular financial reporting.

Neither Fannie nor Freddie has resumed filing timely financial statements, “a particularly troubling issue in unsettled markets,” Lockhart said in the letter to Schumer.

In a statement released by Fannie on Friday before Lockhart’s decision was announced, Mudd said remediation of the company’s accounting and internal controls was largely complete. Fannie, the company’s CEO said, is “on solid footing to take necessary and prudent steps to address current conditions in the secondary mortgage market” by ramping up its purchases of mortgages.

Fannie Mae spokesman Brian Faith said the company had no comment on Lockhart’s decision.

But Lockhart said the GSEs are already providing “notable support” to the markets, having securitized and purchased $120 billion in mortgages in the month of June alone.

There are no caps on the GSEs’ securitization activities, Lockhart noted, and Fannie and Freddie guarantee about $3 trillion in outstanding MBS. That’s more than double the GSEs’ combined retained loan portfolios of $1.4 trillion, although about half of those portfolios consist of the GSEs’ own MBS, which they chose to hold rather than sell.

Even if the caps were lifted or raised, Lockhart said, Fannie and Freddie have traditionally served the market for prime, conventional, conforming loans. Those markets have largely escaped the credit and liquidity issues that have disrupted subprime and Alt-A markets, he said.

“Raising portfolio caps would allow the enterprises to purchase mortgages in this market segment, but would not respond directly to those segments having the most significant difficulties,” Lockhart said.

Problems in the subprime lending market are the result of “deteriorating credit conditions in these market segments that reflect very poor lending decisions and resulting losses to investors and, in many cases, to borrowers,” Lockhart said. He said the Alt-A market is also suffering from “past shoddy underwriting practices.”

Lockhart said the market for jumbo loans — where borrowers have seen interest rates climb sharply in the last week — appears to be going through “a temporary adjustment that reflects liquidity more than credit issues.”

In other words, jumbo loans — those that exceed the $417,000 conforming loan limit — aren’t necessarily performing poorly, but investors are still demanding higher yields to back such loans.

The Alt-A market segment is beyond the scope of the GSEs’ charters, Lockhart said, because Fannie and Freddie purchase mortgages only within the conforming loan limit.

At a press conference Thursday, President Bush said Congress must pass legislation reforming oversight of the GSEs before he will consider allowing them to expand the scope of their activities.

Congress, Bush said, “needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.”

The House has approved legislation that would create a new independent regulator for Fannie and Freddie, with the authority to set limits on the GSEs’ portfolios. The Senate Banking Committee is expected to hold hearings on the Senate version of the bill.

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