Fannie Mae, Freddie Mac May Have Capital Rule Relaxed

[Mammon]

http://www.bloomberg.com/apps/news?pid=206...&refer=home

March 19 (Bloomberg) -- U.S. regulators may reduce capital requirements imposed on Fannie Mae and Freddie Mac, the world's largest mortgage companies, to help them expand their combined $1.5 trillion in investments and revive the market for home loan securities, according to people with knowledge of the plan.

Fannie Mae and Freddie Mac also agreed to raise more capital as part of the deal with the Office of Federal Housing Enterprise Oversight, said the people, who declined to be identified before the agreement was public. Ofheo said in a statement late yesterday that it will hold a press conference with Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron today in Washington.

Fannie Mae and Freddie Mac are required by Ofheo to hold an extra 30 percent capital cushion to protect against losses on the mortgages they own and guarantee. An easing could amount to an extra $200 billion to $300 billion of purchases from the companies, Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a report to clients yesterday.

An easing would ``go a long way to stabilizing panicky markets,'' Shapiro said.

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

Freddie Mac spokesman Doug Duvall, Fannie Mae spokeswoman Janis Smith and Ofheo spokeswoman Corinne Russell didn't immediately return calls after hours seeking comment.

Housing Slump

Fannie Mae climbed 27 percent yesterday, the most since at least 1980, and Freddie Mac jumped 26 percent, its biggest one- day gain ever, in anticipation of the easing. Fannie Mae rose 13 cents in early trading today to $28.35, and Freddie Mac climbed 18 cents to $26.20. Both are down more than 45 percent in the past year.

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.

Fannie Mae and Freddie Mac have said they were limited in how much assistance they could offer amid regulatory constraints 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.

Profit Potential

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.

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.

The companies will be expanding at a time when returns on ``new mortgage purchases are 50 percent-plus,'' Shapiro said.

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

``These are extraordinarily difficult times for the markets, and targeted, immediate action is necessary,'' Schumer, a New York Democrat, said yesterday in a statement. ``A nickel-and-dime approach to freeing the GSEs to become more active in the market will not suffice.''

Capital Relief

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 companies.

``We need to be careful about trying to over rely on the GSEs because the GSEs have a lot of challenges already and there's only so much of a role that they can play,'' U.S. Federal Deposit Insurance Corp. Chairman Sheila Bair said in a Bloomberg Television interview yesterday.

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

Ofheo Director James Lockhart on Feb. 7 told the Senate Banking Committee that Fannie Mae and Freddie Mac need to sustain reserve capital against rising foreclosures and cautioned against encouraging the companies to expand their mortgage assets.

``The risks are beginning to take their toll,'' Lockhart said. ``Credit losses and risks are growing'' for the companies.

Capital Raising

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.

Freddie Mac said on March 12 that it would resist pressure to raise capital and had no plans to increase reserves.

``This company will bow to no one,'' Chief Executive Officer Richard Syron said, responding to a question at a meeting with analysts in New York. ``It's clear what our fiduciary responsibility is,'' Syron said, referring to shareholders.

To contact the reporter on this story: James Tyson in Washington at [email protected].

You gotta love our "capitalist" system where everyone gets bailed out of everything and we all get triple screwed in the end for it.

Edited March 19, 2008 by Mammon

[adrock3215]

Yep. It's Wall Street on welfare. The gains are privatized and the risks are socialized. With such a scenario in place, the banks would be insane to not provide loans to any bum off the street without asking any questions.

[Zip]

Yep. It's Wall Street on welfare. The gains are privatized and the risks are socialized. With such a scenario in place, the banks would be insane to not provide loans to any bum off the street without asking any questions.

I almost wish they'd do more, a lot more, so that the stupidity of controlling the market will create the final great collapse and leave no doubt as to the cause.

But that's wishful thinking, people will just refuse to accept the facts and instead concoct a scapegoat made up of their favorite villains, the rich, big business or that amorphous bogeyman, globalization.