Transcripts

The Fannie Mae/Freddie Mack Portfolio Progress

SUSIE GHARIB: Welcome news for the housing industry today. The regulator that oversees mortgage makers Fannie Mae and Freddie Mac said it will remove portfolio growth caps for both companies on March 1st. Shares of several home builders surged on that news. As Scott Gurvey reports, the action sets the stage for Fannie and Freddie to increase their role in helping with the mortgage crisis.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Government- backed mortgage giants Fannie Mae and Freddie Mac buy mortgages and resell them, packaged as securities. That adds capital to the mortgage market. Both have been restricted from growing their portfolios due to lax accounting and governance issues in the past. Today's action lifts the growth cap. But their regulator James Lockhart says other restrictions, including a surplus capital requirement, will remain.

JAMES LOCKHART, DIRECTOR, OFFICE OF HOUSING ENTERPRISE OVERSIGHT: They have very large operational risk which they're in the process of fixing, but in the meantime, credit risk, interest rate risk and even other types of operational risk like the models that everybody's using today have grown dramatically. So we have to be very careful as we move, reduce the capital.

GURVEY: Lifting portfolio caps and pushing the companies to buy more mortgages increases their exposure to the housing crisis. Fannie Mae today reported a net loss of $3.5 billion for 2007. Still, analyst Eric Wasserstrom of UBS Securities, which does business with Fannie Mae, says Fannie's portfolio will now expand, even thought it increases their risk.

ERIC WASSERSTROM, CONSUMER FINANCE ANALYST, UBS SECURITIES: That pressure exists largely because that's why these institutions were created. So in a certain sense they don't have a lot of option about whether or not to participate. The question is really to what degree and at what levels of pricing. So what you're seeing from them in response is that they're tightening their underwriting standards.

GURVEY: The unanswered question is who will refinance loans that do not meet the tighter standards? House Financial Service Committee Chairman Barney Frank is proposing to use Federal funds to assist as many as one million homeowners, while Senate Banking Committee Chairman Christopher Dodd is revisiting a plan to re-create the depression-era home owners' loan corporation. Dodd got support for the idea from Princeton Professor Alan Blinder, a former Fed vice chairman, but Blinder admits there is opposition.

ALAN BLINDER, PROFESSOR, PRINCETON UNIVERSITY: Not everybody in America made a stupid decision about their mortgages. Many people were quite responsible, are not having trouble now servicing their mortgages and of course would not be helped by an institution like this and I understand that sentiment. The problem is that this issue has gotten so big that it's threatening the whole economy.

GURVEY: Fannie and Freddie also got a boost from Congress as part of the economic stimulus package. It increased the maximum size of the mortgages the agencies can buy from $417,000 to just over $729,000. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.