OFHEO Gives Fannie Mae & Freddie Mac a Much Needed Boost
Wednesday, March 19, 2008PAUL KANGAS: Strong gains today for shares of Fannie Mae and Freddie Mac on news their capital requirements were eased. Their regulator, the Office of Housing Enterprise Oversight, known as OFHEO, said they're cutting the amount of surplus capital the mortgage giants must hold from 30 percent to 20 percent. As Stephanie Dhue reports, the move is aimed at boosting the housing market.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae and Freddie Mac will now have more money to lend since they will hold less capital in reserve. The move could add up to $200 billion immediately into the market for mortgage-backed securities. OFHEO Director James Lockhart says while the move increases risk, it is the right thing to do.
JAMES LOCKHART, DIR., OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT: They have risk out there. There's credit risk. There's market risk, but on the other hand, they have good controls in place and I think this money will be used very prudently.
DHUE: Fannie Mae and Freddie Mac say they will use the money to restore confidence in the mortgage market. That should translate into lower mortgage rates, which have stayed high despite interest rate cuts by the Federal Reserve. The firms will also have greater capacity to buy jumbo loans in high cost markets. In addition, Freddie Mac CEO Richard Syron says new capital will help fund programs to help keep struggling borrowers in their homes.
RICHARD SYRON, CEO, FREDDIE MAC: We're working on a pilot, kind of converting people who can't keep their houses -- rent-to-own sort of program. That will take some capital.
DHUE: Fannie Mae CEO Daniel Mudd cautions this is not a magic bullet, but rather a move that builds on initiatives to increase market liquidity and prevent foreclosures.
DANIEL MUDD, PRES. & CEO, FANNIE MAE: The main point, the main emphasis right now is to continue the momentum. This is not, this is not the last solution that needs to be undertaken. There's more that can be done, more that needs to be done and I think everybody is pulling on the same rope at this point.
DHUE: For years, the Bush administration wanted to put tighter controls on Fannie Mae and Freddie Mac, for fear their collapse could damage the economy. Today, Treasury Secretary Paulson supported expanding their roles, saying, additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market. Stanford Washington Research analyst Jaret Seiberg says today's move may change the perception on Wall Street that the administration hasn't taken the credit crisis seriously enough.
JARET SEIBERG, POLICY ANALYST, STANFORD WASHINGTON RESEARCH: I think we saw with the collapse of Bear Stearns, the administration suddenly do a 180 and become much more active and there is now a growing view that the administration understands the scope of the crisis.
DHUE: The administration says it will continue to push for legislation to strengthen the regulator for Fannie Mae and Freddie Mac. Lawmakers have promised to work on the issue, but analysts are skeptical it will get done this year. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
