updated 3/6/2007 3:05:13 PM ET 2007-03-06T20:05:13

Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.

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Bernanke has previously supported efforts to pare the two mortgage companies’ huge portfolios. This time, however, 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. Those fears contributed to last week’s worldwide stock meltdown, where the Dow Jones industrials suffered a gut-wrenching 416-point plunge.

Lenders to subprime 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 subprime mortgage market are spiking.

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’ subprime loans.

Last week, Freddie Mac announced that it would no longer buy certain risky, subprime mortgages.

Fannie Mae is the No. 1 U.S. buyer of home mortgages; its rival, Freddie Mac, ranks as the second-largest buyer.

Fannie Mae and Freddie Mac — also referred to as government-sponsored enterprises, or GSEs, — were created by Congress to inject money into the mortgage market by buying home loans from banks and other lenders. They bundle the mortgages into securities for sale on Wall Street. Both companies have been scarred by accounting scandals.

On Capitol Hill, various efforts over the past several years to tighten the government’s reins on Fannie Mae and Freddie Mac have ultimately languished. However, prospects for compromise legislation have improved with the Democrats now in control of Congress.

“Legislation to strengthen the regulation and supervision of GSEs is highly desirable, both to ensure that these companies pose fewer risks to the financial system and to direct them toward activities that provide important social benefits,” Bernanke told the banking gathering.

He said the Fed would like to see legislation passed this year.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, is proposing legislation that would give the regulator of Fannie Mae and Freddie Mac the discretion to limit or reduce the two mortgage companies’ holdings.

Fannie Mae’s and Freddie Mac’s combined portfolios from the end of 1990 until the end of 2003 have grown more than tenfold — to $1.56 trillion, Bernanke said. Besides buying mortgage-backed securities, the mortgage giants purchase other types of assets for their own investment portfolios, Bernanke said.

Yet, less than 30 percent of their current portfolio holdings are oriented toward affordable housing, Bernanke said.

“A straightforward means of anchoring the GSE portfolios to a clear public mission would be to require Fannie and Freddie to focus their portfolios almost exclusively on holdings of mortgages or mortgage-backed securities that support affordable housing,” he said.

Bernanke did not provide any fresh insights on the turmoil seen in worldwide financial markets over the past week in his speech or in a brief question-and-session afterward.

He also did not talk about the future course of interest rates in the United States. Many economists predict the Fed will hold rates steady when it meets later this month.

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