Easing Fannie rules might not help market, critics caution -- Little effect likely in subprime sector
|August 9, 2007|
WASHINGTON - Easing the investment constraints faced by Fannie Mae and Freddie Mac might not be enough to rescue homeowners and investors caught up in the mortgage market turbulence.
Shares of the government-sponsored home-loan financiers have surged in recent days on speculation that regulators will raise the amount of mortgage securities Fannie and Freddie can hold as investments. Mainstream Wall Street analysts believe such a move would ease the country's housing woes by injecting more cash into the market.
But critics of the idea caution that such a move would not help Wall Street or Main Street very much, because Fannie Mae and Freddie Mac generally do not buy or guarantee the types of mortgages that are most severely affected.
The companies were created by Congress to pump money into the $8 trillion home-loan market by buying mortgages from lenders and then bundling them into securities for sale to investors worldwide. Combined, Fannie Mae and Freddie Mac finance or guarantee more than 75 percent of all U.S. home mortgages.
Word spread Monday that Fannie Mae had asked the Office of Federal Housing Enterprise Oversight to lift the mandated cap on its mortgage holdings - now about $727 billion - as a way to provide more cash for the distressed mortgage market.
That function is especially crucial now, analysts say, as falling home prices and a spike in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans.
Sen. Christopher J. Dodd, a Connecticut Democrat and chairman of the Senate banking committee, said yesterday that "it may be appropriate, consistent with safe and sound practices as determined by the regulator, to ease the temporary regulatory cap on Fannie and Freddie's mortgage portfolio."
By getting into the market in a crisis, Fannie Mae and Freddie Mac "would fulfill the mission for which they were created and bolster political goodwill," Morgan Stanley analyst Kenneth Posner said in a research note.
Not so fast, said Bert Ely, a banking consultant based in Alexandria, Va., who is a critic of the two companies and longtime OFHEO watcher.
The agency's director, James B. Lockhart, "hasn't given any signal" in recent weeks, as the mortgage market's woes deepened, that he would be amenable to raising the caps on the companies' mortgage holdings, Ely said.
Lockhart has said that Fannie Mae and Freddie Mac, both roiled by accounting scandals in recent years that led to the caps on mortgage portfolios, have made progress toward correcting serious financial weaknesses but still face significant problems and have a distance to go.
Sen. Charles E. Schumer, a New York Democrat who heads Congress' Joint Economic Committee, urged Lockhart in a letter to consider temporarily raising the caps to allow Freddie Mac and Fannie Mae "to perform their critical role as a market stabilizer."
Ely said Fannie Mae and Freddie Mac can simply buy up more mortgages from lenders and package them as securities to inject cash into the market, not needing to expand their investment portfolios.
In April the two companies announced plans to purchase tens of billions of dollars' worth of high-risk subprime mortgages, those targeted to people with weak credit histories, to help borrowers with high-priced loans keep their homes. At the same time, the companies have tightened their policies for purchasing subprime home loans from lenders.
Coopyright 2007 Associated Press