Fannie, Freddie Press Requests To Ease Investment Caps

From the Associated Press:

By Marcy Gordon
Associated Press

Shares of Fannie Mae and Freddie Mac climbed anew Friday, signaling the market's belief that federal regulators will ease investment limits on the two home-loan finance giants as a way to pump cash into the struggling mortgage market.

The Office of Federal Housing Enterprise Oversight is considering a request by Fannie -- bolstered by urgings by key Democratic lawmakers in recent days -- to raise by about 10 percent the mandated cap on its mortgage investment holdings, now at around $727 billion.

Freddie, the other government-sponsored player in the $8 trillion home-mortgage market, also wants to see its limit, now $724 billion, lifted.

Wall Street is optimistic the independent regulator will do so, driving Fannie's stock price 19 percent higher in the past week, while pushing up Freddie's shares by more than 10 percent. The Bush administration, though, opposes the idea: President Bush said the greater priority is putting a tighter government rein on Fannie and Freddie's operations.

In action meant to soothe the turmoil gripping Wall Street, the Federal Reserve announced that it will pump as much money as needed into the country's financial system. The central bank pushed $35 billion in temporary reserves into the system Friday morning, on top of a similar move the day before.

The chief executive of Fannie Mae made the case for action by the housing regulatory agency, promising that the company could help turn up the taps in a market where cash has been drying up.

"We believe that a moderate increase (in the portfolio cap) in the range of 10 percent is appropriate given both current market conditions and the importance of prudent market practice," President and CEO Daniel Mudd said in a statement issued Friday. "We believe this action, in conjunction with actions taken by the Federal Reserve Board and others, would help to alleviate the ongoing credit crunch in the markets and bring an additional measure of stability."

"While Fannie Mae cannot provide a panacea for the ongoing credit turmoil, additional portfolio purchases would allow the company to bring much-needed liquidity to housing market segments that need it most urgently," Mudd said.

OFHEO officials have not made any public statements on the matter. Spokesmen there and at McLean, Va.-based Freddie Mac declined any comment Friday as their shares rose in an otherwise skidding market.

Shares of Fannie gained $1.41 to $67.34 Friday afternoon, near the upper end of its 52-week trading range of $47.17-$69.94. Shares of Freddie rose 33 cents to $62, trading in the middle of its 52-week range of $54.97-$71.92.

The issue has taken on partisan overtones in recent days as the credit squeeze in the mortgage markets has deepened into panic and the contagion has spread across the globe. Bush has insisted on two consecutive days that a legislative overhaul giving the government tighter rein over Fannie and Freddie's operations should precede any changes to the caps on their mortgage portfolios.

"Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options," Bush told reporters at a news conference Thursday.

Both companies were roiled by multibillion-dollar accounting scandals in recent years, which prompted the regulators to install the ceilings on how much mortgage debt they can take on.

Prominent Democratic lawmakers, including the chairmen of the House and Senate banking committees, have urged the regulators to ease the collars on Fannie and Freddie.

"The administration's response to the continued turmoil in the mortgage market is wholly unsatisfactory," Senate Banking Committee Chairman Christopher Dodd, D-Conn., a candidate for his party's presidential nomination, said Thursday. "The Federal Reserve ... has taken, at best, a modest step toward helping to ease the tightening of credit. ..."

"There is no reason why" a congressional overhaul of Fannie and Freddie should be a precondition to a lifting of the portfolio caps, Dodd said.

By Dan Beyers  |  August 10, 2007; 3:08 PM ET  | Category:  Fannie Mae
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