Alongside the release of President Bush's budget proposal for 2007, the White House asked Congress to create a new regulator for home mortgage giants Fannie Mae and Freddie Mac. The regulator would be directed to cut the $1.4 trillion investment portfolios held by the companies.
In the budget proposal, the White House says that it believes the portfolios of loans and securities held by the government-sponsored firms pose a risk to the broader financial system by aggregating interest rates and requiring large amounts of hedging.
The House of Representatives already passed a bill to create a new regulator for the companies, but the White House opposed that legislation because it did not specifically direct the supervisor to cut Fannie's and Freddie's portfolios.
Fannie Mae and Freddie Mac are the two largest buyers of home loans and own or guarantee almost half the $7.6 trillion U.S. mortgage market. The government-chartered companies make their money on the difference between the mortgage returns they buy from lenders and their financing costs.
Fannie has said that accounting errors from 2002 through 2004 could require it to restate $8.4 billion in earnings, while Freddie has said that it understated profits from 2000 until 2002 by $5 billion in an attempt to reduce earnings volatility. Both companies have lobbied against the proposed legislation, saying that the portfolios help them fulfill their mission to support the mortgage market, especially during times of crisis.
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