Federal Reserve Board Chairman Alan Greenspan turned the heat up a little higher under Fannie Mae and Freddie Mac in testimony before Congress last week.

Greenspan, speaking before the House Financial Services Committee, urged Congress to place a ceiling on the two Government Sponsored Enterprises (GSEs) mortgage holdings. Freddie and Fannie buy loans and repackage them as securities for investor purchase. They also retain both mortgages and those mortgage-backed securities for their own portfolios. Together, their owned portfolios exceed $1.5 trillion in value today, and, along with mortgages they guarantee, they control over $4 trillion, more than three quarters, of the nation's total mortgages.

While Greenspan was clear, in his testimony, that there is no immediate threat to the financial stability of the two GSEs, he warned that Congress needs to impose tighter oversight and limits on the growth of their portfolios. To not do this 'sooner rather than later', he said, might pose a threat to U.S. financial systems.

Greenspan recommended that Congress act, within several years, to pass legislation requiring both Freddie and Fannie to divest a large portion of their portfolios.

Greenspan also said that any legislation should clarify the role of the two corporations and their government sponsorship. They were both created by Congress but are investor owned companies trading on the New York Stock Exchange. In spite of this public ownership they do enjoy certain financial advantages from this GSE status. And, while their debt is not guaranteed by the Federal Government, Greenspan is particularly troubled by what he perceives as a certainty among investors that the two corporations are too big to fail. The idea that the government would bail them out of any serious difficulties has given Freddie and Fannie a market advantage over other, less well positioned, competitors.

On the other hand, the two are subject to a number of expectations on the part of Congress about their role in the consumer economy, particularly an oft-stated mandate to increase home ownership among minorities and lower income earners.

This is not the first time that Greenspan has weighed in against the financial power of the two corporations. In testimony before the Senate Committee of Banking, Housing, and Urban Affairs exactly one year ago, he stated:

'Limiting the debt of Fannie and Freddie and expanding their role in mortgage securitization would be consistent with the original congressional intent that these institutions provide stability in the market for residential mortgages and provide liquidity for mortgage investors. Deep and liquid markets for mortgages are made using mortgage-backed securities that are held by non-GSE private investors. Fannie's and Freddie's purchases of their own or each other's securities with their debt do not appear needed to supply mortgage liquidity or to enhance capital markets in the United States.'

In the intervening year, both Freddie and Fannie have come under fire for irregularities in their accounting. Fannie Mae's two top executives were forced to resign, its independent auditor was fired, and it has cut it dividend to meet the demands of its regulator, The Office of Federal Housing Enterprise Oversight (OFHEO), that it increase its capital requirements. Both the Bush Administration and Republican members of Congress have issued strong signals that they intend to tighten both regulations and oversight of the two GSEs and maybe of the 12 Federal Home Loan Banks which are differently governed, but also enjoy many of the same advantages as Freddie and Fannie.

Spokespersons for both Freddie and Fannie disagreed with Greenspan, stating that their activities pump money into mortgage markets, lowering costs and guaranteeing stability during financially unsettled periods.

In the meantime, U.S. Securities and Exchange Commission chief accountant Donald Nicolaisen has stated that it might take as long as a year for Fannie Mae to restate its 2001 to 2004 financial results as demanded by the SEC and OFHEO.