Regulator denies Fannie request to grow investments

WASHINGTON (Reuters) - The federal regulator for Fannie Mae (FNM.N) on Friday denied the mortgage finance company's request to grow its investment portfolio, but did not close the door on the possibility of lifting the cap in the future.

"We will keep under active consideration requests for an increase in the portfolio caps, but we are not authorizing any significant changes at this time," said the Office of Federal Housing Enterprise Oversight according to a prepared statement. "We will continue to reassess that position, especially in the affordable housing area."

Earlier on Friday, Fannie Chief Executive Daniel Mudd asked the regulator to lift a cap on its mortgage holdings by 10 percent to buy more home loans in the rattled mortgage market.

"We believe that a moderate increase in the range of 10 percent is appropriate given both current market conditions and the importance of prudent market practice," Mudd said in a statement.

OFHEO, the regulator for Fannie and Freddie Mac (FRE.N), ordered the companies to hold the growth of their $1.4 trillion combined mortgage investments in the wake of accounting scandals.

Mudd made a formal request to lift the cap by 10 percent in a letter to OFHEO director James Lockhart last week, a company spokesman said.

This week, several lawmakers have asked OFHEO to consider easing a restriction on the companies' mortgage investments.

The Bush administration has said those investments are dangerously bloated and should be controlled.

On Thursday, President Bush spoke out against lifting the investment limits.

"First things first when it comes to those institutions," Bush said. "Congress needs to get them reformed, get them streamlined. Get them focused and then I will consider other options."

In recent weeks, investors have shunned mortgages over fears subprime loans offered to borrowers with damaged credit will see more failures.

A 10 percent increase could amount to more than $70 billion in new mortgage holdings for Fannie. Fannie Mae's and Freddie Mac's portfolios are a combined $34 billion below their regulatory caps, according to June reports from the companies.

OFHEO said the market for mortgages that meet Fannie and Freddie guidelines, known as conforming loans, is "liquid and actively trading," and the "problems in the mortgage markets are concentrated in product areas outside the authorized normal business" of the two enterprises.

Freddie Mac spokesman Douglas Duvall said Friday that the company disagreed with OFHEO's position and "we continue to believe that raising our portfolio cap can bring much needed, additional liquidity to the market."

Robert Steel, Treasury Undersecretary for Domestic Finance, said Friday that he agreed with the OFHEO decision.

"Currently, that market is active and functioning ... The correct approach is to continue to watch this market closely and determine what further role (Fannie and Freddie) may play," he said.

(Additional reporting from Al Yoon in New York)