Fannie, Freddie get OK to buy more mortgages

Federal regulator Ofheo loosens capital requirements to prop up market

By Robert Schroeder, MarketWatch

Last update: 12:03 p.m. EDT March 19, 2008

WASHINGTON (MarketWatch) -- The federal government loosened strict capital requirements on Fannie Mae and Freddie Mac on Wednesday, allowing them to inject billions of dollars into the nation's sagging mortgage market by stepping up their purchase of more loans.

The Office of Federal Housing Enterprise Oversight said it is reducing Fannie Mae's and Freddie Mac's capital-surplus requirement to 20% from 30% previously. The companies will be clear to invest the additional capital in mortgages and mortgage-backed securities.

The move is expected to add up to $200 billion of immediate liquidity to the market for mortgage-backed securities. Wednesday's move by Ofheo, combined with other actions, should enable the two companies to buy or guarantee about $2 trillion in mortgages this year.

Ofheo is the federal regulator for the two companies. In response to accounting scandals at the two companies, Ofheo has been requiring that Fannie and Freddie hold 30% more capital than typically required.

"We believe they can play an even more positive role in providing the stability and liquidity the markets need right now," said Ofheo Director James Lockhart in a statement.

Both Fannie and Freddie are government-sponsored enterprises, or GSEs, that buy mortgages from banks and other lenders and repackage them as securities, thus freeing up liquidity in the mortgage market.

Lockhart noted that both companies will have "prudent" capital cushions above the Ofheo-directed requirements, and have boosted their reserves.

Shares of both companies quickly rose about 20% or more, on the heels of sizable Tuesday rallies, before pulling back. Shares of Fannie Mae lately were up nearly 10%, to $31, while Freddie Mac's shares climbed 12% to $29.18.

Help for foreclosures

Treasury Secretary Henry Paulson welcomed the move, saying freeing up additional capital "will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."

Daniel Mudd, Fannie Mae's chief executive, said his company is working to minimize foreclosures, boost affordability and restore liquidity to the market. "This progressive, sustainable plan will help bring the stability the market needs," Mudd said in a statement.

Freddie Mac CEO Richard Syron said the uncertain mortgage and credit market environment "demonstrates the benefits of [Fannie and Freddie] to the U.S. economy.

"This approach allows us to continue to create these benefits in a way that balances our mission to provide stability, liquidity, and affordability consistent with safety and soundness while enhancing the interests of shareholders," Syron said.

Congressional Democrats also hailed the regulator's move, as did mortgage bankers.

Sen. Charles Schumer, D-N.Y., said Ofheo's action should help head off more problems in the housing and credit markets.

"One of the most important components to reducing the number of foreclosures is giving more flexibility to Fannie and Freddie," Schumer said in a statement. "So this is a major step forward that should help mitigate the spread of foreclosures and provide some relief to the credit markets in general."

Rep. Paul Kanjorski, D-Pa., who chairs a House Financial Services subcommittee on capital markets and GSEs, said the move will help more families buy or stay in their homes.

Ofheo's announcement "will provide a significant and immediate source of capital for America's mortgage markets at a very important time," the congressman said in a statement.