Are GSEs Properly Hedged?

Fannie Mae and Freddie Mac did not properly hedge their giant mortgage portfolios for wide swings in interest rates in the past, and it is unclear whether they are hedged properly today, according to a Treasury Department official.A report by the Office of Federal Housing Enterprise Oversight "suggests that the GSEs' focus on such events have been, at best, lacking -- at worst, dangerously irresponsible," said Treasury assistant secretary Emil Henry Jr. Unless the portfolios are hedged properly, a mismatch in assets and liabilities could quickly lead to insolvency, with a wide-ranging impact on the entire economy, the Treasury official said in a speech stressing the systemic risks posed by the GSE portfolios. Mr. Henry said he doesn't know whether the portfolios are adequately hedged today. "The problem is, we don't know," he told reporters after the speech to the Housing Policy Council. "Why should we learn it in a big interest rate shock?" The Treasury continues to support efforts in the Senate to pass legislation this year that requires the GSEs to reduce the size of their portfolios. "We are hopeful of a legislative solution," he said.