The Office of Federal Housing Enterprise Oversight on March 19 reduced the amount of capital that has to be kept on hand by Fannie Mae and Freddie Mac from 30% to 20% of their portfolios. The move, according to OFHEO, could provide up to $200 billion of immediate liquidity to the moribund mortgage-backed securities market.
The imposition of higher capital requirements, in effect, a surcharge, came in response to efforts by both Fannie and Freddie to put their respective finances in order after accounting scandals rocked both GSEs (Government Sponsored Enterprises, which comprises both Fannie and Freddie).
OFHEO said it estimates that the GSE's existing capabilities, combined with this new initiative and the release of the portfolio caps announced in February, should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. "This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas," OFHEO said in a statement.
Fannie and Freddie concurrently announced that they will begin the process to raise "significant capital," and both said they would maintain capital levels "well in excess of requirements while the mortgage market recovers."
"Let me be clear--both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves," said OFHEO Director James Lockhart. "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."
If Fannie and Freddie are successful at easing the squeeze in the capital markets for mortgages, loans could become more widely available and interest rates could fall as the perceived risk involved with mortgage-backed securities is lessened.
Jerry Howard, CEO of the National Association of Home Builders (NAHB), issued a statement taking issue with the extent of the cut in the capital requirement. "While we appreciate this action, it falls short of providing the liquidity required to stabilize today's credit-squeezed mortgage market," he said. "We were expecting a much bolder step by OFHEO, with a greater reduction in the capital surcharge in light of the severity of the mortgage credit crunch."
The NAHB is also angling for the elimination of "market delivery fees" that were recently added to loans to provide a reserve against future losses. "These fees are a counterproductive tax on homeownership and will work against efforts to stabilize the nation's housing market," the NAHB statement said.