Tie Fannie, Freddie investments to low-cost housing: critics

By Patrick Rucker

WASHINGTON (Reuters) - U.S. Senate critics of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) seek to tie the mortgage finance companies' profit-making investments to low-cost housing, according to a bill introduced on Thursday.

The plan endorsed by four outspoken Republican critics of Fannie and Freddie picks up a suggestion from Federal Reserve Chairman Ben Bernanke, who recently called for the companies' investments to be "anchored" in affordable housing investments.

How a new regulator should best manage the two government-sponsored enterprises' $1.4 trillion investment portfolios has become a key issue in the reform debate. Critics of the two companies have called their investment assets dangerously bloated, while Fannie and Freddie contend the portfolios are a vital business tool that helps stabilize the housing market.

The legislation, introduced by Republicans Chuck Hagel of Nebraska, Elizabeth Dole of North Carolina, Mel Martinez of Florida, and John Sununu of New Hampshire, says "the portfolio holdings ... should be focused, to the maximum extent possible, on mortgages and mortgage-backed securities that meet the affordable housing goals" set out by the legislation.

"Fannie Mae and Freddie Mac must be run properly and with adequate transparency and oversight. We will not tolerate an intentionally weak regulator," Dole said in a statement.

The legislation also calls on a new regulator for Fannie and Freddie to curb the companies' investments overall.

Last month, the House of Representatives Financial Services Committee voted to approve a bill that would give a new GSE regulator broad oversight, but it set no explicit limits on the companies' investments.

By limiting the companies' investments to affordable housing, the measure introduced Thursday would stifle what has been a profitable investment tool. Among other changes, the legislation omits two key provisions of the House bill: an affordable housing trust fund and a measure that would let Fannie and Freddie invest in expensive mortgages.

The reform measure contains many key provisions of a similar bill that passed the Senate Banking Committee in 2005 but was never considered by the full Senate.

Christopher Dodd, chairman of the Banking Committee, has supported the House's less-stringent version of reform. The Connecticut Democrat has not said when he plans to bring his version of GSE reform legislation to the committee.

Among other provisions, the new bill would allow a regulator to close down one of the companies if it were to fail and give that regulator more power to raise capital.