Though many voices clamor for the containment of Fannie Mae and Freddie Mac, one prominent politician is advocating their expansion.

Sen. John F. Kerry, D-Mass., is encouraging the two government-sponsored enterprises to enter the market for subprime mortgages, which are made to borrowers whose credit records are tarnished or who have little or no equity in their homes.

In letters last month to Franklin D. Raines, chairman of Fannie Mae, and Leland C. Brendsel, chairman of Freddie Mac, Sen. Kerry said the subprime industry "lacks the standardization and transparent pricing policies that Fannie Mae and Freddie Mac have helped bring to the rest of the conventional conforming market."

The result, the senator said, is "unnecessarily high rates" for subprime borrowers. Inefficiencies in the subprime market, he said, cost consumers "over 1% more for financing than would be justified, even considering their higher risk profile."

Sen. Kerry credited Fannie and Freddie with eliminating "excess costs" in the prime loan market, "enabling more effective prisays ce competition." He urged the GSEs to explore ways they "could safely bring these benefits to the subprime sector." The letter does not explicitly say that Fannie and Freddie should buy subprime loans.

The letter from Sen. Kerry, the ranking Democrat on the Senate housing subcommittee, comes at a time when Fannie and Freddie have been under fire.

Last month saw the debut of FM Watch, a coalition of trade groups focused on lobbying against expansion by the GSEs outside of the secondary market. Meanwhile, the Mortgage Bankers Association is considering adopting a hard line against any excursions by Fannie and Freddie outside the secondary market.

Not surprisingly, subprime industry officials were wary of Sen. Kerry's suggestions.

Jeffrey L. Zeltzer, executive director of the National Home Equity Mortgage Association, said if Fannie and Freddie were to purchase subprime loans, they would "skim off the best borrowers in the market" and transfer the risk of nonprime lending from the private sector to the government.

In a letter to Sen. Kerry last week, Mr. Brendsel said Freddie shared the senator's concerns about inefficiencies in the subprime sector.

"Our experience can now be put to use for the benefit of subprime borrowers," Mr. Brendsel said.

Freddie, which recently began to serve A-minus borrowers "on a limited basis," has initiatives under way "to determine whether the secondary market can effectively finance loans riskier than A-minus," he said.

Fannie believes that the best way to help subprime borrowers is to "help them move from B and C ratings into A ratings, and then borrow from the conventional market," a spokesman said.

He added that Fannie was helping do this by promoting education and counseling and by making its lending guidelines more flexible, but not by buying nonprime loans.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.