Fannie, Freddie Surplus Capital Requirement Is Eased

Fannie, Freddie Surplus Capital Requirement Is Eased

March 19 (Bloomberg) -- Fannie Mae and Freddie Mac agreed to expand their purchases of U.S. mortgages and related securities after the Bush administration reduced the amount of capital the companies are required to hold as a cushion against losses.

Fannie Mae and Freddie Mac headed toward their biggest two- day gains on record in New York Stock Exchange trading as their surplus capital requirement was cut to 20 percent from 30 percent by the Office of Federal Housing Enterprise Oversight. The government-sponsored enterprises, the largest sources of money for home loans, also agreed to raise ``significant'' new capital.

The goal is to ``help restart the housing engine that powers our economy,'' Fannie Mae Chief Executive Officer Daniel Mudd said at a news conference in Washington today. Freddie Mac CEO Richard Syron added: ``This is what the GSEs were put in place for, to deal with situations like this and we will deliver.''

The initiative may immediately pump $200 billion into the mortgage-backed securities market, Ofheo Director James Lockhart said. Combined with a lifting of portfolio caps on March 1 and the companies' existing capabilities, this should allow Fannie Mae and Freddie Mac to buy or guarantee $2 trillion in mortgages this year, Ofheo said.

This ``is only good news'' for Fannie Mae and Freddie Mac, said Gary Gordon, an analyst at Portales Partners LLC in New York. ``It shows that the political views of the companies have changed radically, it allows them to do more business which adds to earnings, and it has taken a lot of pressure off their capital worries.''

Housing Slump

Fannie Mae rose $2.82, or 10 percent, to $31.04 at 2:38 p.m. in New York after surging 27 percent yesterday. Freddie Mac was up 15 percent to $29.86, a day after rising a record 26 percent.

The looser constraints will ``go a long way to stabilizing panicky markets,'' Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a report to clients yesterday.

The worst housing slump since the Great Depression is being exacerbated by the limited ability of Americans to get mortgages or refinance loans amid tightened standards at money-losing banks. Issuance of non-agency mortgage bonds fell 33 percent last year to $707 billion, according to newsletter Inside MBS & ABS.

The National Association of Home Builders said today's action falls short of what's needed to revive the housing market.

``We were expecting a much bolder step,'' association Chief Executive Officer Jerry Howard said in a statement today. His Washington-based trade group represents 235,000 members involved in residential construction, remodeling and manufacturing.

$53 Billion

Created by Congress to boost homeownership, Fannie Mae and Freddie Mac profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They own or guarantee at least 40 percent of the $11.5 trillion in U.S. residential-mortgage debt outstanding.

Fannie Mae and Freddie Mac have said they were limited in how much assistance they could offer amid regulatory limits and rising losses. Fannie Mae, the largest source of money for home loans, posted a record $3.55 billion fourth-quarter loss as rising foreclosures sent credit costs soaring. Freddie Mac reported a record $2.45 billion net loss for the period.

The 30 percent surplus capital constraint most recently tied up as much as $53 billion at the two companies combined -- based on core capital on Dec. 31 -- that could have been invested in the mortgage market.

Raising Capital

Yields on Fannie Mae's five-year debt over five-year U.S. Treasuries fell 3 basis points to 87 basis points at 12:55 p.m. in New York, down from 115 basis points on March 14, according to data complied by Bloomberg. The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed- rate mortgage bonds and 10-year government notes fell about 9 basis points, to 175 basis points, above the three-week low hit when speculation about the move started March 17.

The companies didn't say today how or when they would raise the additional capital.

Fannie Mae in December raised $7 billion in a preferred stock sale and cut its dividend by 30 percent, while Freddie Mac in November sold $6 billion in preferred stock and halved its dividend to bolster cash reserves amid mounting credit losses and asset writedowns stemming from the housing market collapse.

``It's critical for them to have additional capital,'' Lockhart said at the news conference. ``These companies are safe and sound and we're going to ensure by our everyday oversight that they continue to be safe and sound,'' Lockhart said.

Profit Potential

Credit-default swaps tied to Fannie Mae's senior bonds dropped 8 basis points to 50 basis points, according to broker Phoenix Partners Group in New York, suggesting a decline in perceived risk. Freddie Mac fell 7 basis points to 51.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements. The Bush administration, trying to stem the crisis, has gradually eased constraints on Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. Ofheo lifted a ceiling on the companies' mortgage assets and raised a limit on the loans they buy to $729,750 from $417,000 in some counties.

Fannie Mae and Freddie Mac are effectively getting ``capital relief without giving in on regulatory reform,'' Shapiro wrote.

Capital Relief

Lawmakers including Senate Banking Committee Chairman Christopher Dodd and Senator Charles Schumer have called on Ofheo this year to relax the excess capital requirement.

Ofheo's ``announcement gives a real shot in the arm to the idea that maybe we can get a good handle on the foreclosure crisis'' by deploying capital from Fannie Mae and Freddie Mac, Schumer, a New York Democrat, said in an interview with Bloomberg Television. ``Now is the time for them to step up to the plate,'' raise capital and fulfill their mandate to stabilize housing.

The Bush administration, including Ofheo and the Treasury, resisted loosening restraints on Fannie Mae and Freddie Mac before the creation of a tougher regulator for the government- sponsored enterprises because of the accounting mistakes.

``There's been a huge revolution in the way the Fed and the Treasury view the GSEs,'' Margaret Kerins, a strategist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a telephone interview. ``They moved from wanting the GSEs to support the mortgage market only through securitization, to now supporting them in their role as a buyer of last resort.''

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