Transcripts

Federal Regulators Are Relaxing The Restrictions on Fannie Mae & Freddie Mac

PAUL KANGAS: Federal regulators are easing some financial restrictions on mortgage giants Fannie Mae and Freddie Mac. The Office of Federal Housing Enterprise Oversight now says it will allow the two companies to increase the size of their mortgage portfolios. But as Darren Gersh reports, critics in Congress called the action a small move in the face of a large need.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The move to ease investment restrictions on Fannie Mae and Freddie Mac marks a small retreat by regulators. The Bush administration had clamped down on the mortgage giants after a financial reporting scandal broke in 2004. Now, analyst Alec Phillips says the higher portfolio limits give the companies more breathing room.

ALEC PHILLIPS, WASHINGTON ANALYST, GOLDMAN SACHS: Just in the near term, it does allow them to expand their portfolios at least a little bit, which is an area of profitability for them. But second, it probably does also suggest that there is more to come.

GERSH: Regulators say Fannie Mae's investment cap will increase 2 percent next year to $735 billion. Freddie Mac's limit will also increase and together, the two companies are expected to inject an additional $20 billion a year into the mortgage market. Mortgage Bankers Association chief economist Doug Duncan says that's likely to result in a marginal benefit to credit-worthy borrowers.

DOUG DUNCAN, CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION: If you're a middle class borrower of prime quality -- you always pay your loans on time and you have a good credit record -- you may see some decline in the interest rate that you would see in the marketplace because they have a little more liquidity.

GERSH: Fannie Mae and Freddie Mac buy mortgages from lenders and then sell them off to other investors. Fannie Mae says a larger increase in its portfolio would allow the company to do more to address turmoil in mortgage markets. Some Democrats agree. They also want to give Fannie Mae the authority to buy loans of $600,000 or more, potentially easing tight credit in the jumbo loan market. But economist Dean Baker says the problem is many borrowers now owe more than their homes are worth.

DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH: No private lender is going to refinance that mortgage. Now, if we bring in Fannie and Freddie, well, what are they going to do? If they are following good lending standards, they also would refuse to refinance that mortgage.

GERSH: The timing of today's announcement is no coincidence. Tomorrow, Congress will grill Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke about their plans to cope with the wave of foreclosures washing over America. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.