WASHINGTON – Created by Congress (search) to buy mortgages from lenders, Fannie Mae and Freddie Mac aim to keep more money in the credit flow pipeline that home buyers use.
But after a series of concerns over financial management, tighter regulation and portfolio limits of the two mortgage giants are needed, Federal Reserve Chairman Alan Greenspan (search) told a congressional panel on Wednesday.
Soundness is a concern to congressional members because Fannie Mae (search) says its debts are almost $11 billion greater than it had earlier reported and because 40 percent of the nation's local banks have 100 percent of their primary reserves in notes from Fannie and Freddie.
Greenspan said any crisis with the two mortgage companies — known as Government-Sponsored Enterprises — could have a disastrous spillover effect on the banking system.
"If we fail to strengthen GSE regulation, we increase the possibility of insolvency and crisis," he said in testimony to the Senate Banking, Housing and Urban Affairs Committee.
Fannie and Freddie have vastly increased their control of the residential mortgages, jumping from about $750 billion worth to almost $4 trillion in just a few years. That's about 45 percent of the total market, a percentage that is too high in Greenspan's view and too great a risk for the whole banking system.
"We put at risk our ability to preserve safe and sound financial markets in the Unites States — a key ingredient of support for homeownership," Greenspan said.
Concerns about the security of the companies grew with the accounting problems that led to the firing of top executives, including former Clinton budget director Franklin Raines.
"I think a lot of us are disappointed with the breakdown that we've seen in accounting of these two major housing institutions and have serious concerns," said Sen. Jon Corzine, D-N.J.
Sen. Chuck Hagel, R-Neb., has proposed legislation to set up a regulatory agency with the power to compel the companies to sell off any assets that don't lend credibility to their mission of making homeownership more widely available.
"Given the frequency of major accounting and management problems at both Fannie Mae and Freddie Mac over the past two years, Congress must act to ensure that the [companies] are adequately regulated and do not pose any systemic risk to our economy," Hagel said.
But one Democratic senator, while conceding problems are evident, charged that reform efforts are really an attempt to destroy the two institutions.
"Fannie and Freddie have a problem," said Sen. Charles Schumer, D-N.Y. "Instead of fixing the problem, ideologues want to take advantage of that, and they've been chafing at the bit for a long time to undo Fannie and Freddie."
But Sen. Jim Bunning, R-Ky., said without some sort of reform in the mortgage industry business, the rest of the financial system is in jeopardy.
"To those outside this committee who have shown they don't want a bill, all I can say is be careful what you wish for."
Click in the box near the top of the story to watch a report by FOX News' Jim Angle.