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Fannie and Freddie Requirements Eased, Liquidity Boost Expected

The Office of Federal Housing Enterprise Oversight announced today that capital restrictions placed on mortgage financiers Fannie Mae and Freddie Mac will be eased to allow for improved liquidity in the struggling mortgage market.

The current 30 percent capital cushion requirement will be lowered to just 20 percent, with further reductions possible in the future.

Fannie and Freddie will also be permitted to use a “significant portion” of their capital surplus to invest in mortgages and mortgage-backed securities, which should allow the GSEs to purchase or guarantee roughly $2 trillion in mortgages this year.

The move will allow the financing giants to do more in the jumbo conforming mortgage arena, provide more subprime refinance loans, and execute more loan modifications for borrowers trapped in high-cost loans with unaffordable mortgage payments.

Additionally, all parties involved have recognized the need for and agreed to work on comprehensive GSE reform, as the mortgage financiers will now be the ultimate backstop to the mortgage market.

“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. OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.”

As part of the initiative, both companies have announced that they will raise significant capital to ensure they maintain a healthy surplus.

Shares of Fannie Mae climbed more than 10 percent, while brother Freddie rose more than 14 percent in afternoon trading on Wall Street, while most banks and mortgage-related stocks moved higher on the news.

(photo: flattop341)

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