There is a "wide and sophisticated pool" of mortgage investors who could pick up the slack if Fannie Mae and Freddie Mac reduce their investments in mortgage assets, according to a high-ranking Treasury Department official."With an appropriate phase-in period, we believe that our capital markets could adjust to a significant reduction in the presence of the GSEs as mortgage investors," said Treasury Under Secretary Randal Quarles. In building a case for portfolio limits, Mr. Quarles noted that the two government-sponsored enterprises would continue to play a "vital" role in the secondary mortgage market if they are forced to cut back on the size of their mortgage portfolios. "Their securitization and guarantee activities are now an integral and large part of the fabric of our housing credit markets and, as such, these businesses serve well the original GSE mandate," he said. The Treasury official told an international banking group that he remains "hopeful" that progress can be made in passing a GSE regulatory reform bill this year. However, the legislation in the Senate appears to be stalled due to the Bush administration's insistence on portfolio limits. The two GSEs have combined assets of $1.4 trillion. "We'd like to see these holdings substantially reduced," Mr. Quarles said.

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