Sec. Paulson calls for reform of Fannie Mae, Freddie Mac

U.S. Treasury Secretary Henry Paulson on Tuesday voiced doubt about lifting the portfolio caps on Fannie Mae and Freddie Mac, calling such demands a “red herring” that would do nothing to ease the turmoil in the credit markets or help borrowers at risk of losing their homes.

{mosads}He urged the Senate to start moving on legislation to reform Fannie and Freddie, known collectively as government sponsored enterprises (GSEs), and said he favored allowing them to take on more risk, but only in the context of reform.

“The Senate has got more work to do,” Paulson told a press gathering arranged by The Christian Science Monitor. “I think the Senate can get this done, and do it quickly, and we can all work together.”

Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the heads of the Senate and House banking panels, have repeatedly called on the Bush administration to lift the temporary caps on the GSEs’ portfolios to inject liquidity into the troubled mortgage market.

There is heated speculation among investors that the administration will comply, but President Bush has so far resisted the appeals.

On Monday, Sen. Charles Schumer (D-N.Y.) introduced legislation to lift the portfolio caps by 10 percent temporarily and raise the conforming loan limits on mortgages purchased by the GSEs by up to 50 percent for high-cost areas. The legislation would require the GSEs to steer half the additional funds from the loosened caps toward helping borrowers with adjustable-rate mortgages refinance into new loans.

Paulson argued that lifting the caps on Fannie and Freddie wouldn’t help those at risk of foreclosure because the GSEs buy prime mortgages. “We don’t have a problem in the prime market,” he said.

Echoing remarks made by Bush, the Treasury secretary said that any expansion in the GSEs’ role would need to be accompanied by legislation to give them a new and stronger regulator.

In May, the House passed legislation to set up an independent regulator for Fannie Mae and Freddie Mac, which had both become mired in accounting scandals in recent years. But such legislation faces a steep climb in the Senate, where the Banking Committee has yet to take up GSE reform.

Noting that some 10 million homeowners have sub-prime mortgages, Paulson said his major concern was getting troubled borrowers into products that would help them hold onto their homes.

Paulson tamped down fears of recession stoked by last week’s dismal employment report, which showed the economy lost jobs in August for the first time in four years. “I think the capital markets turmoil is taking place against the backdrop of a very strong economy,” he said.

While the weakness in the housing market and the problems in the credit markets would take their toll on growth, he said, “it’s very much arguable that the economy will keep growing despite these two penalties.”

But Paulson also warned that the credit markets would take time to digest the sub-prime mortgage mess. “This is something, in my judgment, that will take a while to work through.”

On the tax front, Paulson expressed alarm that lawmakers had failed to advance legislation to patch the Alternative Minimum Tax, declaring it “the longest Congress has ever gone in the past six years” without passing a temporary shield from the tax.

“The fact that it’s this late in the year and it hasn’t been patched is a concern to me, and frankly, a surprise to me,” he said.