Wednesday March 19, 03:05 PM
US regulatory shift adds 200 billion dlrs to mortgage market
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WASHINGTON (AFP) - US regulators announced a plan Wednesday to allow government-sponsored mortgage firms Fannie Mae (NYSE: FNM - news) and Freddie Mac (NYSE: FRE - news) to pump an extra 200 billion dollars into the troubled housing market.
The Office of Federal Housing Enterprise Oversight (OFHEO) said it would allow the two firms to invest a portion of their 30 percent capital surplus in mortgages and mortgage-backed securities.
The new regulations will lower the minimum capital requirement for the two agencies to 20 percent from 30 percent.
This move is expected to help lenders provide more cash at a potentially lower rate of interest to the housing market that has been suffering from a meltdown linked to troubles in the subprime sector, where loans are made to people with poor credit, and a related squeeze of lending.
Treasury Secretary Henry Paulson praised the agreement, saying "additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."
The two mortgage giants are key players in US mortgage finance. Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae's portfolio and loan guarantees amount to 2.9 trillion.
Both Fannie and Freddie are stockholder-owned firms created by Congress to provide funds for the housing market by buying mortgages and related securities and issuing mortgage-backed bonds.
The eased capital requirements came after OFHEO concluded the two firms had corrected accounting problems that had led to probes in the past few years.
"In view of this progress, the public purpose of the two companies, and ongoing market conditions, OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future," the regulator said in a statement.
"Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year," said OFHEO director James Lockhart.
"Let me be clear -- both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity the markets need right now."
Fannie Mae president and chief executive Dan Mudd said that despite the turmoil in housing, "We are working with our customers, regulators and policy makers to minimize foreclosures, increase affordability -- and as of today -- to restore liquidity in the market."
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