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Democrats would unload junk mortgages onto Fannie and Freddie

Section: Daily Dispatches

Democrats Call for Action on Mortgage Crisis

By Andrew Ward and Stephanie Kirchgaessner
Financial Times, London
Tuesday, August 7, 2007

WASHINGTON -- Influential Democratic senators on Tuesday called for Fannie Mae and Freddie Mac, the government-sponsored mortgage companies, to be given a bigger role in efforts to stabilise the troubled US mortgage market.

Chris Dodd, chairman of the Senate Banking Committee, and Chuck Schumer, chairman of the Senate subcommittee on housing, supported the lifting of investment caps on the companies.

Hillary Clinton, the New York senator and Democratic presidential frontrunner, also urged expansion of the mortgage groups.

The comments added to growing hope among investors that Fannie and Freddie would be freed to buy more mortgages from struggling lenders, easing the crisis in the subprime sector.

Federal regulators are understood to be reviewing the portfolio caps imposed on Fannie and Freddie last year after a probe found flaws in their accounting, corporate governance, and risk management practices.

"It may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie’s mortgage portfolio," said Mr Dodd.

Such a move would "allow Fannie Mae and Freddie Mac to provide needed stability to the secondary mortgage market," said Mr Schumer.

Mrs Clinton proposed expansion of the groups among measures to tackle weaknesses in the mortgage market and ­support homeowners. She vowed to clamp down on "unfair lending practices" and create a $1 billion federal fund to help homeowners avoid foreclosure.

Mrs Clinton said fixing the mortgage crisis would be among the priorities of Democratic lawmakers when Congress returns.

"We need to put an end to fly-by-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals," she said. "We need to help those facing the pain of foreclosure. We need to secure the market place and put reforms in place right now."

The remarks added to the populist economic rhetoric that has become a theme of the Democratic presidential campaign as candidates respond to concern about economic insecurity among middle-class Americans.

Steve O'Connor, senior vice president for public policy at the Mortgage Bankers Association, said there were signs that Democratic lawmakers could favour a bailout of homeowners, but that such a proposal would be mired in difficulties.

"You have to think of whom you are bailing out, and are you really helping who you intend to help?" he said. "A lot of loans going bad are held by speculators. You can argue that you shouldn't be bailing out speculators."

One banking lobbyist in Washington said the idea of a bailout had been rejected because of its cost. He predicted disagreement among Democrats because Rep. Barney Frank, chairman of the House Financial Services Committee, would support a measure assigning liability on some of the big trading houses, whereas Mr Dodd, his Senate counterpart, would not.

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