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Loan Limits Relaxed For Freddie, Fannie

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, September 20, 2007

A federal regulator yesterday adjusted restraints on Fannie Mae and Freddie Mac, saying the changes will allow the government-sponsored mortgage-funding companies to buy more subprime loans and help borrowers avoid foreclosure.

Fannie Mae and Freddie Mac were chartered by the government to keep mortgage money flowing. They buy mortgages from lenders and package mortgages into securities for sale to other investors, which gives lenders money to make more loans.

Last year, they accepted limits on their mortgage purchases in agreements with their regulator, the Office of Federal Housing Enterprise Oversight, after separate accounting scandals at the two companies.

The companies have argued that those limits should be relaxed so they can pump more money into troubled mortgage markets, and Democratic lawmakers have taken their side.

OFHEO Director James B. Lockhart III, who had resisted the pressure, said yesterday's changes would provide a moderate increase in the companies' buying power. The agency said it still opposes major increases in the limits because it remains concerned about the "safety and soundness" of the companies' operations.

Fannie Mae and Freddie Mac, which together hold about $1.4 trillion in mortgage-related investments, expressed disappointment that the agency didn't take a bigger step.

"We believe that more should be done to help alleviate the credit crunch," Freddie Mac spokeswoman Sharon McHale said.

Under the changes announced yesterday, OFHEO made slight adjustments in the overall limits and tinkered with the way they are administered, saying the new approach will give the companies "additional flexibility."

For instance, Fannie Mae, which was operating under a fixed investment ceiling of $727.7 billion, will be allowed to increase its purchases at the same rate as Freddie Mac: up to 2 percent annually and 0.5 percent each quarter. In addition, both companies will be allowed to expand their mortgage portfolios by an extra half of a percent in the fourth quarter of this year.

The agency also made several changes to the way it measures the size of the companies' mortgage investments and to how it sets the limit on those investments. The effect of the changes is difficult to quantify.

Under the old system, the companies could not take full advantage of their purchasing capacity because estimates of the size of their portfolios were subject to wide fluctuations based on changing market conditions. To cope with the unpredictability and avoid exceeding the caps, the companies maintained large margins of error, OFHEO said. Minimizing the unpredictability under the new system should allow the companies to buy more loans.

The announcement by the regulatory agency came one day before a congressional hearing at which top administration officials are likely to face questions about the adequacy of the government's response to turmoil in the mortgage markets.

"[T]he more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10 percent so that we can more fully address the ongoing turmoil and bring much-needed liquidity to the mortgage market," Fannie Mae spokesman Brian Faith said.

OFHEO said both companies expect to produce audited financial statements on a timely basis in February. When that happens, "we would anticipate the cap being removed," Faith said.

Meanwhile, Treasury Secretary Henry M. Paulson Jr. was planning to announce a shift in the administration's posture toward Fannie Mae and Freddie Mac in congressional testimony today. Paulson would support temporarily increasing the size of loans the companies are allowed to securitize, currently $417,000, if the increase is part of a broader bill to overhaul regulation of the companies, according to a person familiar with the testimony who spoke on condition of anonymity because it had not yet been delivered.

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