Democrats haven’t embraced a proposal to give Fannie Mae and Freddie Mac additional leeway to refinance $125 billion in subprime mortgages, with one legislator going so far as to post a letter on his Web site from a Bush administration official that shoots the idea down.

Rep. Paul Kanjorski, D-Pa., wrote James Lockhart, the head of the federal regulator that oversees the safety and soundness of Fannie and Freddie, on Oct. 24, asking for his views on a proposal to temporarily increase Fannie and Freddie’s debt limits.

In his Oct. 31 response to Kanjorski, Lockhart called legislation that would allow a temporary increase in Fannie and Freddie’s combined $1.46 trillion loan portfolios “unnecessary, unsafe and unsound.”

The legislation “could have the unfortunate effect of appearing to set a target for subprime purchases that (Fannie and Freddie) may not be able to meet safely,” Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said in his letter.

Kanjorski published the letter on his Web site Thursday, saying lawmakers would be wise to heed Lockhart’s advice.

“We should carefully consider the judgment of our safety-and-soundness regulators who have the capabilities to fully examine the risk involved,” Kanjorski said in a statement. “By doing so, we hope to avert the potential of repeating the mistakes of the savings-and-loan crisis.”

HR 3838, a bill that would raise the limits on Fannie’s and Freddie’s loan portfolios by 10 percent, for a six-month period, was introduced Oct. 16 by Rep. Barney Frank, D-Mass. Sen. Charles Schumer, D-N.Y., introduced a similar bill in the Senate, S 2169, on the same day. Neither bill has attracted cosponsors, and both have been referred to committees.

Kanjorski rolled out legislation of his own that day, HR 3837, aimed at combating the coercion of appraisers and deceptive mortgage servicing practices. The 12-term Congressman has scheduled a press conference for Monday on the bill, which has eight cosponsors.

Scheduled to speak at Kanjorski’s press conference is New York Attorney General Andrew Cuomo, who this week made headlines with a lawsuit accusing First American Corp. and its subsidiary eAppraiseIT of colluding with lender Washington Mutual to inflate property appraisals (see Inman News story).

The Bush administration has generally opposed raising limits on the government-sponsored entities’ (GSEs) loan portfolios or increasing the $417,000 conforming loan limit, saying legislation to increase oversight of Fannie and Freddie should be passed first.

Congress has debated such legislation for several years in the wake of accounting and management scandals that led both companies to restate several years of earnings.

In his letter to Kanjorski, Lockhart said Fannie and Freddie “have made progress in remediating the major operational, financial reporting, systems and risk management problems that resulted in the imposition of portfolio caps and other restrictions, but much work remains to be done.”

Lockhart said OFHEO is concerned that falling home prices are already increasing credit losses at Fannie and Freddie, and that regulators “would be concerned about the rapid and substantial portfolio growth, and the considerable growth in subprime exposure” that would presumably be allowed by the bills introduced by Frank and Schumer.

Caps on the GSEs’ loan portfolios have been a major obstacle to passage of a GSE reform bill, with Democrats generally preferring fewer restrictions than Republicans.

On May 22, the House approved a GSE reform bill, HR 1427, which the Bush administration warned would “significantly” weaken the ability of regulators to set limits on Fannie’s and Freddie’s loan portfolios.

The bill would also allow the GSEs to securitize loans of up to $625,000 in high-cost areas, but Frank has said he regrets that the bill did not mandate an increase in the conforming loan limit and has urged the Senate to include such provisions in its bill.

Lockhart said an increase in the portfolio caps is unnecessary because Fannie and Freddie already have unused capacity to buy or securitize more mortgages.

On Sept. 19, OFHEO said it would allow the GSEs to change the way they measure their portfolios and give them leeway to buy or securitize an additional $40 billion in mortgage loans in the following six months. Both were given the ability to grow their loan portfolios — loans that are bought and held for investment, rather than securitized and sold to private investors — by 2 percent per year.

“Given the new portfolio cap flexibility, portfolio maturities and sales and securitizations, on a combined basis, Fannie Mae and Freddie Mac could buy and securitize more than the legislative goal of $125 billion over a six-month period in subprime rescue mortgages without an increase in the portfolio caps,” Lockhart said in his letter to Kanjorski.

But Lockhart said both Fannie and Freddie actually reduced their retained mortgage portfolios in September, even as they issued $1.5 billion in preferred stock.

Supporters of the proposal to allow a temporary increase in Fannie’s and Freddie’s loan portfolios say that allowing the GSEs to buy mortgages, rather than securitize them, would provide more liquidity to secondary markets that have been disrupted by investors’ fears about rising delinquencies and foreclosures.

But Lockhart warned that if the GSEs were given temporary additional borrowing capacity to buy up large volumes of subprime “rescue mortgages,” they might not be allowed to keep them on their books for long.

By using their existing capacity to not only buy, but securitize, loans, Fannie and Freddie “would not have to shed the subprime mortgages after six months, which could cause a market disruption,” Lockhart said. “Rest assured OFHEO will monitor growth in subprime exposure very closely, with ongoing review of the program’s risk management and operations.”

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