Federal Reserve Chairman Alan Greenspan on Thursday said much of the risk posed by Fannie Mae and Freddie Mac would be eased if the mortgage finance giants were required to hold as much capital as commercial banks. "Unquestionably if their risk-based capital were raised to the level of where commercial banks are that would assuage a good deal of the problem," Greenspan told a Senate panel.
Greenspan has argued the portfolios held by government-sponsored enterprises Fannie Mae and Freddie Mac should be reduced because they pose a threat to the broader financial system by aggregating so much interest rate and prepayment risk, and in turn requiring a large degree of hedging at companies that hold relatively little capital.
Raising the amount of capital they must hold could lessen the risk Fannie and Freddie pose, but it would not hinder the companies' ability to sell debt at below-market rates by cashing in on Wall Street's view that the companies are backed by the government.
Greenspan argued that despite claims to the contrary, the companies' portfolios do not play a role in increasing market liquidity or lowering mortgage prices offered to homebuyers.