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Rep. Frank questions safety of Fannie, Freddie investments

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An influential voice on Capitol Hill has unexpectedly called into question the safety of investing in Fannie Mae and Freddie Mac, raising the specter that investors who have lent money to the two firms or bought their mortgage-backed securities could one day suffer losses. The comments by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, come despite the assumption of many investors that investments in the two mortgage finance giants are risk-free. Until now, federal officials -- who took over Fannie and Freddie two years ago to save them from collapse -- have signaled to the market that lending the companies money is just about as safe as lending to the US government itself. "People who own Fannie and Freddie debt are not in the same legal position as [those who own] Treasury bonds, and I don't want them to be," Frank said in an interview Thursday. If investors believe that Fannie and Freddie carry some risk, they could demand a higher interest rate to lend them money or buy their mortgage-backed securities. This in turn could ripple across the entire US housing market, prompting an increase in the mortgage rates that borrowers must pay. Frank's remarks came in the context of a discussion about possible ways the federal government could overhaul Fannie Mae and Freddie Mac, which have together received more than $100bn in emergency federal aid to cover their losses. He said he "absolutely" would consider requiring investors in the two companies to take some losses themselves. In restructuring the companies, Frank said he wants "to preserve the right to give people haircuts." He added, "I don't want to preclude that."

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