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(2007) Fannie and Freddie Polish Image With Subprime-Loan Purchases
Freddie Mac and Fannie Mae said they expect to buy tens of billions of dollars of newly created subprime mortgage loans over the next few years to help prop up the roughly $1.3 trillion subprime market as lenders tighten their credit standards or flee altogether.

The move shows how the two government-sponsored companies are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income.

The promises to help such borrowers are bolstering their support in Congress just as lawmakers debate legislation to tighten regulation of Fannie and Freddie, both emerging from accounting scandals. That makes it less likely that Congress will back longstanding calls from the Federal Reserve and others for tight constraints on the amounts of mortgages they can retain as investments, currently around $1.4 trillion, or 14% of U.S. home loans outstanding.

Congress has grown increasingly worried in the past few months that rising defaults on subprime loans will soon lead to a record wave of foreclosures, depriving hundreds of thousands of families of their homes. That worry has overshadowed earlier warnings from the Bush administration that Fannie and Freddie, chartered by Congress to support the housing industry, had grown so large that they could set off a financial crisis if they fail to manage their interest-rate risks correctly.

Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, said at a hearing on subprime problems Tuesday that the companies' capacity for buying and holding mortgages is proving useful. That, he said, undercuts the notion that their mortgage holdings "are this 'bad thing.'"...