Regulators Adjust Restraints On Fannie, Freddie
A federal regulator today adjusted restraints on Fannie Mae and Freddie Mac, saying the changes would make it easier for the government-sponsored mortgage funding companies to tackle problems in the subprime mortgage market and help borrowers avoid foreclosure.
The regulator, though, stopped short of allowing any major increase in the overall volume of loans the companies can buy.
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.
Both companies have been repairing flaws in their financial systems that came to light years ago as a result of accounting scandals. Last year, they accepted limits on their mortgage purchases in agreements with their regulator, the Office of Federal Housing Enterprise Oversight.
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 has resisted the pressure. The agency said today it still opposed big increases in the limits because it remains concerned about the "safety and soundness" of the companies' operations.
Instead, 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."
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 a step.
"We believe that more should be done to help alleviate the credit crunch," Freddie Mac spokeswoman Sharon McHale said.
Under the changes announced today, 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 during the fourth quarter of this year.
The agency also made several changes to the way it measures the companies' mortgage investments and sets the limit on those investments. The net of the effect of the changes is difficult to quantify.
For example, one of the changes would have reduced Freddie Mac's unused buying capacity by $2.5 billion in July, the latest month for which data is available. The gap between Freddie's actual holdings and its permitted holdings would have narrowed to $14.4 billion under the new system from $16.9 billion under the old system. For Fannie Mae, the change would have increased its unused capacity by about $500 million.
Other changes would have combined to alter the bottom line further, but it isn't possible to say how based on available data.
Still, 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 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," said Fannie spokesman Brian Faith.
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.
--By David S. Hilzenrath
September 19, 2007; 5:08 PM ET
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