Pressure, not law, could ease GSE caps -Rep. Frank

By Patrick Rucker

WASHINGTON, Sept 10 (Reuters) - Political pressure rather than new legislation is the best way to win an easing of the investment caps for Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the chairman of the U.S. House of Representatives Financial Services Committee said Monday.

The mortgage finance companies are under orders from their regulator to freeze their combined $1.4 trillion investment holdings while they recover from accounting scandals.

The companies and their political allies have argued that those caps should be lifted so that Fannie and Freddie can buy more mortgages and bring stability to the now-roiling market. But lawmakers differ over how best to win that concession on the companies' investments.

On Monday, Sen. Charles Schumer, who heads the housing panel of the Senate Banking Committee, introduced a bill that would give Fannie and Freddie more investment freedom under a new law.

Rep. Barney Frank, a Massachusetts Democrat who heads the House Financial Services Committee, said new laws were not the right tool to lift the investment caps since legislation did not create the caps in the first place.

"It's hard to lift by statue caps that don't exist statutorily," Frank said in an interview with Reuters. "I think we just have to press the administration."

The Office of Federal Housing Enterprise Oversight, the regulator for Fannie and Freddie, imposed the investment restrictions, but Frank said he would also put pressure on the Treasury Department to let the companies grow their holdings.

Frank said Fannie and Freddie "should not defy their regulator" and grow their investments unilaterally, but that they can help their allies in Washington win over the administration of President George W. Bush, who has spoken against lifting the caps.

"Help us make the case, document the case ... document the extent to which Fannie and Freddie now have reasonable accounting systems and can handle this. And commit that -- if we give them (freedom to grow their portfolios) -- they are going to do something for subprime."

In recent months, financial markets have been rocked by increasing failures among subprime borrowers who won home loans despite their weak credit histories.