Fannie, Freddie to Pump $200 Billion into Market

The Government Is Easing Cash Cushion Requirements for the Two Agencies

By MARCY GORDON

WASHINGTON (AP) -- The U.S. government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion (euro127.4 billion) of financing for home loans.

The initiative, which will require Fannie and Freddie to raise substantial funds, is part of a broader government strategy to ease a credit crisis that has made it difficult for consumers and businesses to borrow, and spread fear throughout global financial markets.

The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, said the mandatory cash cushion for Fannie and Freddie -- now nearly $20 billion (euro12.7 billion) for the two -- will be reduced by a third under the new plan. The freed-up money will go toward buying mortgages of struggling homeowners, enabling them to refinance into more affordable loans.

The capital requirement for each company will be reduced from the current 30 percent to 20 percent, and further reductions will be considered in the future. Fannie and Freddie will raise additional capital through special sales of stock or cuts in dividends.

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 (euro107 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 (euro265,740) to $729,750 (euro465,050) 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 (euro960 billion) cap on their mortgage-investment holdings.

The oversight agency estimated that the combination of these efforts should allow Fannie and Freddie to purchase or guarantee roughly $2 trillion (euro1.2 trillion) in mortgages this year.

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, policy makers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages.

"This is what (Fannie and Freddie) were put in place for. ... And we will deliver," Freddie Mac Chairman and chief executive Richard Syron said.

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.

Story comes courtesy of ABC News Corp.

Updated Information

According to David Gaffen over at Wall Street Journal's Market Beat:

One benefit of these developments is increased liquidity, and with that, presumably, more accurate pricing. “The effort to bring liquidity back is an effort to bring some certainty,” says Adolfo Laurenti, senior economist at Mesirow Financial. “It doesn’t matter that if with certainty comes big write-downs — at least know the value of what you have.”

Some have questioned this move, particularly considering the accounting and risk-control problems that both government-sponsored entities found themselves in over the last few years, which caused OFHEO to initiate these caps. “It wasn’t that long ago when Fannie and Freddie were the problem, now they are the solution,” writes Calculated Risk.

The move should reduce Freddie’s capital requirement by about $2.6 billion and Fannie’s by $3.2 billion.