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Gov't Has Plan to Ease Capital Collars
Tuesday March 18, 10:15 pm ET
By Marcy Gordon, AP Business Writer
Government Announcing Plan to Ease Capital Restraints on Fannie, Freddie


WASHINGTON (AP) -- The government is announcing a plan Wednesday to loosen capital restraints on Fannie Mae and Freddie Mac so that the mortgage-finance companies can expand their roles in the stricken housing market, people familiar with the matter said Tuesday.


The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, has reached agreement with them on an arrangement in which the cash cushion they are required to maintain against risk -- now nearly $20 billion for the two -- will be reduced by a third. The freed-up money will go toward buying mortgages of struggling homeowners to enable them to refinance into more affordable loans.

The capital requirement for each company will be reduced from the current 30 percent to 20 percent, one person familiar with the discussions said. Under the deal, Fannie and Freddie will commit to raise additional capital. That could be done through special sales of stock or cuts in dividends. Together they will be expected to provide up to $200 billion in new funding for home loans, the person said.

The federal agency scheduled a news conference for Wednesday morning with its director, James B. Lockhart, Fannie Mae President and Chief Executive Daniel Mudd, and Freddie Mac Chairman and CEO Richard Syron. The subject was not disclosed, but people familiar with the matter said the plan to reduce the required capital reserve would be announced. They spoke on condition of anonymity because the plan hadn't yet been made public.

OFHEO spokeswoman Stefanie Mullin declined to comment, as did Fannie Mae spokesman Brian Faith. Spokesmen for Freddie Mac couldn't immediately be reached for comment Tuesday evening.

The two companies together hold or guarantee around $4.9 trillion in home-loan debt. As the mortgage crisis and ensuing credit crunch have worsened in recent months, policy makers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages.

It would be the third step the government has taken in recent weeks to allow Washington-based Fannie and McLean, Va.-based Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.

The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

Influential Democratic lawmakers have been pushing for a reduction in the companies' capital-holding requirements. Bush administration officials and numerous Republican lawmakers, on the other hand, have long opposed allowing Fannie and Freddie to take on more debt, contending that doing so could threaten the global financial system.

http://biz.yahoo.com/ap/080318/fannie_freddie_capital.html?.v=1