Fannie Mae and Freddie Mac Portfolio Limits Removed

February 27, 2008 No Comments »

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The Office of Federal Housing Enterprise Oversight announced today that it will lift the caps currently constraining the growth of the government sponsored entities’ mortgage portfolios.

Fannie Mae and Freddie Mac’s regulator noted that the two have been timely in releasing their financial statements and have met the requirements of their respective Consent Orders.

“Fannie Mae published its timely, audited financial statement for 2007 today and Freddie Mac anticipates publishing its statement tomorrow,” said OFHEO Director James B. Lockhart said in a statement on its website.

“These steps constitute an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements.”

The mortgage financiers had previously been involved in accounting irregularities that led to an investigation by the Justice Dept. and restrictions on the companies’ portfolios.

“Both companies have been operating under regulatory restrictions stemming from these past problems,” Lockhart continued.

“These restrictions include growth limits on their retained mortgage portfolios, Consent Orders prescribing necessary remediation actions, and required 30 percent capital cushions above the statutory minimum capital requirements.”

“In recognition of the progress being made by both companies, as indicated by the timely release of their 2007 audited financial statements, and consistent with the terms of the relevant agreements, OFHEO will remove the portfolio growth caps for both companies on March 1, 2008.”

The OFHEO said it is also considering a reduction to the capital cushion, noting that the GSEs are well capitalized at current levels after announcing their preferred stock offerings.

“As each Enterprise nears the lifting of its Consent Order, OFHEO will discuss with its management the gradual decreasing of the current 30 percent OFHEO-directed capital requirement,” said Lockhart.

“The approach and timing of this decrease will also include consideration of the financial condition of the company, its overall risk profile, and current market conditions. It will also include consideration of the importance of the Enterprises remaining soundly capitalized to fulfill their important public purpose and the recent temporary expansion of their mission.”

The news couldn’t have come at a better time, as Fannie Mae announced a fourth quarter loss of $3.6 billion, or $3.80 a share this morning, leading to a net loss of $2.1 billion for all of 2007.

The loss compares to a profit of $604 million in the same period a year earlier, and fell way below Thomson Financial analysts expected loss of $1.24 a share as it set aside $2 billion for bad loans.

Shares of Fannie were up 71 cents, or 2.63%, to $27.68, while Freddie climbed 32 cents, or 1.27%, to $25.53.

When the news of the portfolio caps being lifted was announced, both stocks saw multi-dollar gains, which eventually subsided.

Fannie and Freddie already own or guarantee roughly 40% of the $10.9 trillion U.S. residential mortgage market.

(photo: preciouskyhatt)

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