Fannie, Freddie Can't Do More

Before this summer's financial turmoil in the credit markets, Fannie and Freddie were under pressure to shrink and face tougher regulations.

After accounting scandals broke out at both companies in recent years, the Office of Federal Housing Enterprise Oversight imposed limits on the size of their retained mortgage portfolios, citing "not only credit risk but significant interest rate and operational risks," as well as "significant systems, operational, control, and risk management challenges" at both firms.

But now that Washington, D.C., has woken up to the long-festering lending problems in the U.S. housing market, the political winds have shifted.

"[Fannie and Freddie's] political fortunes have been reversed in a very short period of time with a big bounce upwards," says Alex Pollock, a resident fellow with the conservative think tank American Enterprise Institute. "No doubt executives at Fannie and Freddie view this as their greatest profit opportunity in years. Spreads are blown out in the jumbo loan market, so all they have to do get permission to go in and buy this stuff up cheap."

While regulators eased portfolio limits on Fannie Mae slightly last month, leading Democrats in Congress announced a plan last week to further increase the caps for both companies so they can provide refinancing options to subprime borrowers in troubled loans and buoy home prices.

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