Fannie, Freddie free to pump billions into mortgage market

Fannie, Freddie free to pump billions into mortgage market


WASHINGTON — The government has freed up billions of dollars at Fannie Mae (FNM) and Freddie Mac (FRE), money that can be used to help homeowners refinance mortgages on the brink of default.
The Office of Federal Housing Enterprise Oversight, which oversees the government-chartered companies, unveiled a plan to ease mandatory capital requirements. It said the plan is expected to result in an immediate infusion of up to $200 billion into the market for mortgage-backed securities.

The mandatory cash cushion for Fannie and Freddie — now nearly $20 billion for the two — will be reduced by a third under the new deal. The freed-up money will go toward buying mortgages of struggling homeowners to enable them to refinance into more affordable loans.

Fannie and Freddie, now private companies, were created by Congress to create a secondary market for mortgages. They buy mortgages from banks and other primary lenders, giving them cash to lend again. Fannie and Freddie then package the mortgages as securities and sell them to investors.

The capital requirement for each company are being reduced from 30% to 20%. Under the deal, Fannie and Freddie will commit to raise additional capital. That could be done through special sales of stock or cuts in dividends. Together they will be expected to provide up to $200 billion in new funding for home loans, according to a person familiar with the deal, who spoke on condition of anonymity before the plan was made public.

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OFHEO, the federal agency, held a news conference with its director, James Lockhart, Fannie Mae President and Chief Executive Daniel Mudd, and Freddie Mac Chairman and CEO Richard Syron.

The two companies together hold or guarantee around $4.9 trillion in home-loan debt. As the mortgage crisis and ensuing credit crunch have worsened in recent months, policymakers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages.

It was the third step the government has taken in recent weeks to allow Fannie and Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.

The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

Influential Democratic lawmakers have been pushing for a reduction in the companies' capital-holding requirements. Bush administration officials and numerous Republican lawmakers, on the other hand, have long opposed allowing Fannie and Freddie to take on more debt, contending that doing so could threaten the global financial system.