Federal regulators say they’re giving Fannie Mae and Freddie Mac additional leeway to buy up to $200 billion in mortgages and mortgage-backed securities by relaxing stringent capital requirements put in place in 2004 in the wake of management and accounting scandals.
Fannie and Freddie have agreed to raise "significant capital" to stay "well in excess" of the loosened requirements, which should allow the government-sponsored entities (GSEs) to purchase or guarantee $2 trillion in mortgages this year, according to the Office of Federal Housing Enterprise Oversight.
That capacity will permit Fannie and Freddie to "do more" in the jumbo temporary conforming market, subprime refinancing and loan modifications areas, OFHEO said in a press release.
The move follows a decision by OFHEO last month to lift a $1.5 trillion cap on loans and mortgage-backed securities the GSEs were allowed to buy and hold as investments (see Inman News story).
Fannie and Freddie provide liquidity to the secondary market for loans in two ways: by buying and holding mortgages and mortgage-backed securities (MBS) as investments, and by securitizing and guaranteeing large pools of loans that are sold to other investors.
Mortgage Bankers Association Kieran Quinn called OFHEO’s action "a crucial step" in jumpstarting the stalled mortgage market.
"This immediate injection of liquidity reestablishes the pipeline of funds flowing from secondary-market mortgage purchasers to primary market lenders," Quinn said in a statement. That, in turn, makes it easier for lenders to offer financing to a wide variety of borrowers, including those looking to refinance.
"This should help keep some at-risk borrowers in their homes, which will help stabilize the real estate market," Quinn said.
The National Association of Home Builders called the move a good start, but said the group was expecting a "much bolder step by OFHEO" in the form of a greater reduction in the excess capital requirements.
In a statement, NAHB called on Fannie and Freddie to eliminate market delivery fees that were recently created to build up reserves against future losses, calling them "a counterproductive tax on home ownership" that work against efforts to stabilize housing markets.
Under 2004 consent orders put in place after Fannie and Freddie were forced to restate several years of earnings, the GSEs have been required to maintain capital levels at least 30 percent above statutory minimums established by Congress. OFHEO today reduced the excess capital requirement to 20 percent — a level still far in excess of reserves banks are required to maintain — and said it will consider future reductions.
Even before a separate, $1.5 trillion cap on Fannie and Freddie’s investment portfolios was lifted last month, mounting losses at the GSEs — $9.5 billion in the second half of 2007 — forced them to raise additional capital and trim their investment portfolios to stay within the excess capital requirements.
Although the GSEs were each authorized to grown their held-for-investment portfolios to $742 billion by the end of 2007, Fannie’s loan portfolio totaled $721 billion at the end of January, down from $732 billion in October. Freddie also pared down its retained investment portfolio from $732 billion last August to $717 billion in January.
Nevertheless, Freddie Mac briefly fell short of its minimum capital requirements in November, and only came back into compliance after issuing $6 billion in preferred stock in December (see story).
By the end of the year, Fannie Mae had amassed $45.4 billion in core capital, a 9.3 percent cushion above the $41.5 billion required under the consent order. Freddie Mac’s $37.9 billion in core capital gave it a 10 percent surplus above its $34.4 billion OFHEO requirements.
"Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year," OFHEO Director James Lockhart said in a statement. Both companies have "prudent" capital cushions and have increased their reserves, he said, and OFHEO believes the GSEs "can play an even more positive role in providing the stability and liquidity the markets need right now."
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