Senate Finance Committee Chairman Christopher Dodd told CNBC on Tuesday that he asked the Bush administration to lift the portfolio caps on housing finance giants Fannie Maeand Freddie Mac, but Treasury Secretary Henry Paulson expressed reluctance to do so.
"The power (to lift portfolio caps) exists within the regulator and certainly if the President of the United States and the Secretary of the Treasury would indicate the importance of that, I think it would happen," Dodd said on CNBC's Morning Call.
"I think indicating a willingness to raise those caps would have value right now," Dodd added.
The Democratic senator from Connecticut, who met with Paulson and Federal Reserve Chairman Ben Bernanke Tuesday morning, said later during a press conference that he had urged the two to use "all the tools at their disposal here to keep our markets working" and keep credit flowing.
He said allowing Fannie and Freddie to expand their mortgage portfolios would help stabilize housing markets and could be done with a regulatory order.
"This would have, I think, a positive effect of dampening down interest rate hikes within the conforming loans that Fannie and Freddie may deal with here," Dodd said. "Secretary Paulson has expressed his views on the subject matter and has indicated they're not likely to move in that direction, but I'm going to continue urging them to do so."
Dodd recently criticized the Federal Reserve, saying the central bank has been lax in its responsibilities by not preventing the surge of subprime mortgage loans.
"I left here with the sense that the Fed gets it and understands (mortgage industry problems)," said Dodd. "I'm still concerned the Treasury does not understand the importance of this issue."
"The Secretary of the Treasury (Henry Paulson) pointed out that this is going to take some time to resolve this -- I don't disagree -- but there can be steps that can be taken to prevent this from spilling over into other sectors of the economy," Dodd said. "I'll be anxious to hear what steps they take in the coming days."
The candidate for the Democratic nomination said he's backing a bill that would establish "low-interest-rate, safer" mortgage loans, in hopes of sparing borrowers -- and the market -- from the risks involved in subprime lending.
Amid tightening credit markets -- which make the situation of secondary mortgage lenders such as Countrywide Financial that much more precarious -- some analysts have called for raising the portfolio cap on government-backed mortgage giants Fannie Mae and Freddie Mac.
The portfolio cap is the ceiling on mortgage bonds Fannie Mae and Freddie Mac are permitted to buy and hold. Currently, the cap for Fannie Mae is $727.2 billion; Freddie Mac is capped at a 2% annual growth rate on its current $712.1 billion portfolio.
Countrywide, the largest U.S. mortgage lender, said last week it drew down an $11.5 billion bank credit line after losing some access to short-term borrowings. On Monday, it was reported that the bank began enacting employee layoffsto help offset the credit squeeze