The government's implied guarantee of Fannie Mae and Freddie Mac is encouraging them to delve into businesses outside their central mission, according to a Congressional Research Service report.

The government-sponsored enterprises provide liquidity to the mortgage market by purchasing loans from mortgage bankers. Though they are private corporations, it is generally believed that if they got into trouble, the federal government would bail them out. This lets them borrow at rates lower than even the healthiest corporations.

"Once the assigned market has been saturated by the GSEs, the incentive remains to increase profits by increasing the extent of the subsidy," the report says. "Attempts to enter other markets are logical to the corporation, regardless of whether any market failure exists."

This, the report says, explains Freddie's failed attempt in October to get permission to self-insure loans with low down payments. "The insurers' costs of doing business are higher. ... Freddie Mac had the capacity to undercut the insurers' pricing and take their business."

Fannie and Freddie officials took issue. "We stick to the charter we operate under and have no lust to move out of it," a Fannie spokesman said. He added that the company does nothing other than "providing consumers with better, cheaper access to homeownership."

A Freddie spokeswoman said that last year's failed initiative would have involved the use of escrow-like "spread accounts" and not self-insurance.

"Everything we do we try to tie back to our mission," she added. "It's proven that the implied guarantee is passed on to consumers."

The Congressional Research Service provides background information to lawmakers.

The report, dated Jan. 19, also argues that an expansion of the Federal Home Loan banks' charter could help correct distortions in the mortgage market it says Fannie and Freddie create.

The Home Loan Bank System's members, the report notes, compete with Fannie and Freddie in the mortgage market and would benefit from greater subsidized long-term funding. "To the extent that the system is able to offset the competitive imbalances caused in part by other GSEs, portfolio lending ... may remain more viable," the report says.

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