Federal Housing Finance Board Chairman Ronald Rosenfeld has warned Congress that it would be very difficult to shrink Fannie Mae's and Freddie Mac's portfolios without causing serious damage to the profitability of the government-sponsored enterprises.Mr. Rosenfeld told the Senate Banking Committee that Fannie's and Freddie's mortgage portfolios are far larger than is necessary to provide liquidity for the secondary market. However, because of their narrow charters, it would be very difficult for them to replace this source of income, he argued. "If the mortgage portfolio is substantially reduced, as some have suggested, the deterioration in profits could have serious consequences," Mr. Rosenfeld warned. Congress is considering legislative proposals to allow a new GSE regulator to limit the size of the GSE portfolios. However, Congress is not expected to set any specific caps or call for any specific dollar reductions. Concerning the Federal Home Loan Banks, Chairman Rosenfeld said he will be issuing guidance this summer that would place some form of cap on the size of the mortgage portfolios held by individual FHLBanks.

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