Fannie and Freddie Caps Eased

September 19, 2007 No Comments »

The Office of Federal Housing Enterprise Oversight announced today that it will ease the current caps on Fannie Mae and Freddie Mac.

The government-sponsored entities, along with certain Democratic senators, had been lobbying in recent weeks to boost the caps in an effort to take in more loans to boost the ailing residential mortgage market.

“These changes will make it easier for the enterprises to manage market-based fluctuations in their portfolios and reduce the need to keep large cushions below the portfolios caps,” said OFHEO Director James Lockhart in a press release.

The portfolio caps currently set at $727 billion allow Freddie Mac to grow marginally, but do not allow Fannie Mae to increase its share.

The new agreement will push the caps to $735 billion and permit Fannie Mae to increase its portfolio by 2% a year, with no more than 0.5% growth per quarter.

And during the fourth quarter beginning October 1, both agencies may increase their share by 1% so long as it stays within the 2% annual growth limit.

“This added flexibility will be especially helpful in making multi-billion dollar bulk purchases of subprime and multi-family housing mortgages and fulfilling the enterprises’ commitments to purchase subprime mortgages to help borrowers avoid foreclosure,” OFHEO said.

Though the news was somewhat positive, Senator Schumer and the two government-backed agencies had hoped for more.

“Now that OFHEO has put its toe in the water, it is time to jump in,” Sen. Schumer said in a press release. “The GSEs certainly need more room to grow their mortgage portfolios, as I have been saying all along. But an increase this small doesn’t respect the magnitude of this crisis. Hopefully this rigid, ideologically driven opposition to raising the caps is about to fade.”

Both Fannie and Freddie released similar statements, asking for more to be done to ease the portfolio caps, looking for an increase of at least 10%.

Freddie Mac senior vice president of communications David Palombi also called for a provisional increase to the conforming loan limit, currently set at $417,000 for single-family residences.

“A temporary lifting of the conforming loan limit would enable us to provide needed liquidity to a segment of the jumbo market where mortgage money has become much more expensive relative to the conforming market. In high cost areas in particular, this might prevent declines in home prices that could lead to additional defaults,” he said.

Though the caps weren’t extended as high as the agencies would have liked, the move coupled with the Fed rate cut is a step in the right direction.

Temporary portfolios caps were established last year because of financial reporting problems at both Fannie Mae and Freddie Mac, forcing each to restate earnings due to massive accounting mistakes.

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