Housing finance giants Fannie Mae and Freddie Mac have the potential to pose systemic risks to the financial system and need a stronger regulator, U.S. Treasury Secretary Henry Paulson said on Tuesday.
Paulson, in testimony before the Senate Banking Committee, urged Congress to pass legislation to reform oversight of the two government-sponsored enterprises, with modifications that provide them temporary government backstops for liquidity and equity capital.
"We have long maintained that the GSEs have the potential to pose a systemic risk and worked with Congress on legislation to create a GSE regulator with authorities appropriate to the task and on a par with other financial regulators. We must complete this work,'' Paulson said.
He said the proposal announced over the weekend to give the Treasury temporary authority to increase the GSES' credit line and purchase their shares if needed "was not prompted by any sudden deterioration in conditions at Fannie Mae and Freddie Mac .''
Nonetheless, he said, steps were needed to respond to market developments and boost confidence in the two institutions that serve as the core of U.S. housing finance by providing assurances that they have access to liquidity and capital.
Persistent worries about shareholder dilution and the long-term stability of Fannie and Freddie, which provide liquidity to the housing market by buying and securitizing mortgages, have ravaged their stock prices in recent days.
"Given the difficulty in determining the appropriate size of the (GSE) credit line we are not proposing a particular dollar amount, Paulson said. "Flexibility is the best means of increasing market confidence in the GSEs and also the best means of minimizing taxpayer risk.''
He stressed, however, that there were no immediate plans by Fannie or Freddie to access the proposed increased Treasury credit line, nor to seek Treasury purchases of its equity.
"If either of these authorities is used, it would be done so only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed by both Treasury and the GSE,'' Paulson said.
He said he was continuing to encourage the GSES to raise capital and said confidence in the institutions was important to maintaining financial system and market stability.
"Fannie and Freddie play a central role in our housing finance system and must continue to do so in their current form as shareholder owned companies,'' he said.