U.S. May Loosen Reins on Fannie, Freddie
Deal Would Reduce Companies' Required Amount of Capital, Allowing More Mortgage Purchases

By David S. Hilzenrath
Washington Post Staff Writer
Tuesday, March 18, 2008

Federal officials are discussing a possible deal with Fannie Mae and Freddie Mac that would enable the government-sponsored companies to increase their purchases of mortgages and mortgage-backed securities and pick up slack in the deeply troubled housing finance system, sources familiar with the discussions said yesterday.

The deal would involve reducing the amount of capital the companies are required to maintain as a cushion against losses, the sources said, speaking on condition of anonymity because of the sensitivity of the discussions or lack of authorization to comment publicly.

Relaxing the capital requirement could send a message to anxiety-stricken mortgage markets that a measure of help is on the way. It could buoy investors' confidence in the profit potential of Fannie Mae and Freddie Mac, whose stock prices have taken a beating. It could also expose the giant companies to greater risk.

The discussions involve the Office of Federal Housing Enterprise Oversight, which regulates the financial safety and soundness of the two companies, and the Treasury Department, sources said. A deal could be concluded as early as this week, one source said, but there is no assurance that an agreement will be reached.

The potential agreement was reported yesterday on the Web site of the Wall Street Journal.

Fannie Mae, based in the District, and McLean-based Freddie Mac were chartered by the government to promote homeownership and a smoothly functioning mortgage system. They have two main businesses: investing in mortgages directly and packaging them into securities for sale to other investors. When the companies securitize mortgages, they guarantee to make the payments on the loans if the borrowers default.

Through those functions, Fannie Mae and Freddie Mac help lenders move mortgages off their own balance sheets and make funds available for the issuance of new loans. Historically, mortgage securities guaranteed by Fannie Mae and Freddie Mac have been highly marketable, partly because the companies are perceived as having the implied backing of the federal government.

The companies' ability to buy and securitize mortgages has been constrained recently by a requirement that they maintain 30 percent more capital than usual. OFHEO negotiated that surcharge with each company after they were wracked by twin accounting scandals. Meanwhile, as investors have dumped mortgage-related investments, even securities guaranteed by Fannie Mae and Freddie Mac have suffered.

As part of the deal under discussion, OFHEO would reduce the 30 percent capital surcharge. The companies would agree to subsequently raise additional capital through the financial markets, one source said.

OFHEO has been wary of relaxing the 30 percent surcharge and potentially leaving the companies in a more precarious position. The companies have been resistant to raising additional capital at the expense of their current shareholders.

"The extraordinary circumstances in the market have created a situation that allows all the parties involved . . . to meet in the middle in a way that hasn't been possible previously," one source said.

Fannie Mae and Freddie Mac would commit to increasing their own mortgage purchases to boost demand, the other source said. Federal policymakers "need buyers -- long-term, balance-sheet, buy-and-hold investors," that source said.