Banks at Risk From Heavy Mortgage Investments?

Commenting on an observation that Fannie Mae's mortgage-related growth has been slow relative to that of banks, Fannie Mae chairman Franklin Raines said he considers the company's growth strong enough and thinks banks are exposing themselves to some risk by investing so heavily in mortgage products.Mr. Raines told listeners to the Morgan Stanley Financial Services' webcast CEOs Unplugged Conference 2003 that he believes when interest rates rise and the yield curve flattens, banks will exit the mortgage investment market simultaneously in a way that will be disadvantageous to the financial institutions but advantageous to Fannie Mae. Wall Street observers, whose firms sell mortgage investments to banks, have acknowledged that sudden and sharp changes in interest rate and yield-curve conditions could hurt the investments that banks favor, but said they consider such changes unlikely.