The Federal Reserve Chairman gave his strongest advice to date to Freddie Mac and Fannie Mae yesterday to cut the size of their portfolio’s. They have such a commanding portion of the secondary mortgage market that missteps by the quasi public private companies could pose risks to the economy.

Both of the mortgage giants have cut their exposure to the  subprime loans with Freddie Mac saying they will no longer purchase them. Bernanke thinks that the companies should not be as active in the general mortgage market and focus on mortgages that serve a public purpose.

Bernanke has previously supported efforts to pare the two mortgage companies’ huge portfolios. This time he was a bit more specific and recommended that their holdings might be linked to a “measurable public purpose, such as the promotion of affordable housing.”

The Fed chief’s suggestion was contained in remarks delivered via satellite to a bankers meeting in Hawaii.

His remarks come as worries about risky mortgages are making investors jittery.

Lenders to sub-prime borrowers — people with blemished credit histories — have been battered. Rising interest rates and weak home prices have made it increasingly difficult for these borrowers — especially those with adjustable-rate mortgages — to keep up with their mortgage payments. Delinquencies and foreclosures in the sub-prime mortgage market are surging.

Against this backdrop, Bernanke said he wanted to be clear that by suggesting the change in Fannie Mae’s and Freddie Mac’s portfolio holdings, he was not advocating a change in the exposure of the mortgage giants’ sub-prime loans.

Bernanke: Mortgage giants should cut assets – Los Angeles Times.

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3. Christmas Surprise – Fannie Mae and Freddie Mac Get Bailout
4. Who Is Watching Fannie And Freddie? Answer Nobody Now. Internal Auditor Fired