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No Sure Sign Caps Will Be Lifted for Fannie Mae, Freddie

Despite ongoing mortgage market turmoil, regulators for Fannie Mae and Freddie Mac have given no signal they will lift a cap on the companies home loan holdings, and opposition to such a move still appears firm within the Bush administration.

Fannie Mae and Freddie Mac, the nation's two largest sources of mortgage finance, together hold about $1.4 trillion of mortgage investments. Their regulator, the Office of Federal Housing Enterprise Oversight, has ordered the portfolios capped. Fannie Mae's investment portfolio cap is about $727 billion, while Freddie Mac's cap is $710 billion.

As the crisis in the subprime mortgage market has spread in recent weeks, the companies and their allies in Washington have called for OFHEO to lift those investment caps and let the firms sop up more home loans, which they argue would help restore some stability to a distressed market.

U.S. Sen. Charles Schumer, a member of the Senate Banking Committee, said Thursday he would introduce legislation to do what OFHEO will not. An aide to the New York Democrat said the bill would lift the caps between 5 percent and 10 percent.

On Friday, OFHEO had rejected a request from Fannie Mae to let it increase its portfolio by 10 percent, but the regulator left the door open to raising the cap in the future.

Despite that caveat and ongoing market upheaval, the companies are not likely to win a concession from OFHEO soon.

In an interview published in the Wall Street Journal Thursday, Treasury Secretary Henry Paulson said only that the administration is "looking at all the policy levers available to us."

In other recent statements, senior Treasury and OFHEO officials have noted the market for conventional loans bought by Fannie Mae and Freddie Mac remains relatively strong.

Brian Gardner, a vice president at investment bank Keefe, Bruyette & Woods Inc., said that is a signal the administration is unlikely to shift its position.

"I don't think (regulators) are likely to take extraordinary measures here," Gardner said. "The signals are that they see it as an asset class bubble and they don't want to be seen bailing it out."

As it weighs how to deal with the market disruptions, regulators might note that Fannie Mae and Freddie Mac have not yet pushed the limit of their existing investment caps.

According to June reports from the companies, Fannie and Freddie Mac's portfolios are a combined $34 billion below their caps, which would give them room to grow.

In addition, Freddie Mac has yet to fulfill earlier promises to invest in subprime loans. In April, the company has said it would buy $20 billion in subprime loans, but so far has only bought $105 million. That purchase of home loans from Wells Fargo was "a first step but a good one," said Michael Cosgrove, a spokesman for the company.

Fannie Mae has refinanced $5.4 billion of former subprime loans under a program called HomeStay, which its chief executive, Daniel Mudd, has called "first steps" in stabilizing the mortgage market.

The fact that Fannie Mae and Freddie Mac have not pushed the limit of their subprime purchases indicates "that it will take a fair amount of time to get the risk management and pricing tools in place," said Moshe Orenbuch, who follows the companies for Credit Suisse First Boston.

Neither firm is ready to immediately dive into the mortgage market even if the investment cap were lifted, although both companies are seeing opportunities, he said.

"Their economic models are calling for this. The returns are there," Orenbuch said.

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