Fannie, Freddie Cleared To Buy More Mortgages

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, March 20, 2008

The federal government yesterday gave Fannie Mae and Freddie Mac permission to operate with a reduced safety net in order to increase their aid to the troubled mortgage market.

The step could allow the two federally chartered finance companies to immediately increase their investment in mortgages by a combined $200 billion, potentially compensating for weak demand from other investors. That could improve the availability and affordability of home loans, leaders of the two companies said.

Together, the two companies already hold more than $1.4 trillion of mortgages and securities backed by mortgages.

Yesterday's decision by the Office of Federal Housing Enterprise Oversight reduces the amount of capital that Fannie Mae and Freddie Mac are required to hold as a cushion against losses.

OFHEO Director James B. Lockhart III dismissed as "nonsense" speculation that one or both of the companies could require a bailout. Both companies are financially safe and sound, he said at a news conference. In a statement, he pledged to supervise them with vigilance and "act quickly to address any deficiencies that may arise."

As the market has deteriorated, the companies have lost billions of dollars, and they are predicting their losses from defaults and foreclosures will continue. Freddie Mac temporarily fell below its capital requirement in November. Yesterday's announcement "should help restore confidence in the market," Lockhart said in an interview.

The action represented a shift in regulators' posture toward Fannie Mae and Freddie Mac, underscoring the severity of the mortgage crisis and the pressure on government officials to do something about it.

In the seemingly healthy market before the housing bubble burst, regulators were warning that Fannie Mae and Freddie Mac were taking on so much risk that they posed a potential hazard to the financial system.

As recently as last month, Lockhart said that any easing of the capital requirements should be coupled with passage of long-stalled legislation that would overhaul regulation of the companies, both of which spent years recovering from multibillion-dollar accounting scandals.

Sen. Charles E. Schumer (D-N.Y.), a major ally of the companies, called for other conditions.

"Any capital relief has to come with a substantial new commitment [by Fannie Mae and Freddie Mac] to purchase loans for struggling subprime borrowers," Schumer said at a February hearing. "If Fannie and Freddie won't enter this agreement voluntarily, we should consider imposing it as part of the agreement to lift the capital surcharge."

In the aftermath of the accounting scandals, OFHEO made use of its limited oversight powers to extract agreements from Fannie Mae and Freddie Mac that they would maintain 30 percent more capital than normally required. Yesterday, OFHEO said it is reducing that 30 percent surplus requirement to 20 percent and will consider further reductions.

CONTINUED     1        >

© 2008 The Washington Post Company