Instead of setting arbitrary limits on the size of Fannie Mae's and Freddie Mac's mortgage portfolios, Congress could use market mechanisms to restrain their growth, according to a real estate finance professor.Professor Richard Green of George Washington University told a National Association of Realtors' forum in Washington that eliminating the portfolios would reduce liquidity in the secondary market and decrease the availability of mortgage products, including fixed-rate mortgages. However, he said Congress could require the two government-sponsored enterprises to finance more mortgage purchases with subordinated debt so it is clear to investors that the debt is not backed by the U.S. government. Or the government could impose a tax or fee on the issuance of GSE debt to reduce the profitability of their mortgage investments. "That would probably mean that mortgage rates would go up by a basis point or two," Mr. Green said. In contrast, American Enterprise Institute resident fellow Peter Wallison told the NAR legislative conference that eliminating Fannie's and Freddie's portfolios would have no impact on liquidity or the availability of FRMs. The GSEs could continue to provide the same benefits to the housing market through the "securitization of mortgages without creating risks for the taxpayers," Mr. Wallison said.

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