Fannie, Freddie to get lending boost

Government plans to ease capital requirements on the two firms so they can provide more funding for home loans.

March 19, 2008: 4:45 AM EDT

WASHINGTON (AP) -- The government is loosening capital restraints on Fannie Mae and Freddie Mac so that the mortgage-finance companies can expand their roles in the stricken housing market.

The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, was announcing the plan Wednesday, people familiar with the matter said Tuesday.

The agency has reached agreement with the companies on an arrangement in which the cash cushion they are required to maintain against risk - now nearly $20 billion for the two - will be reduced by a third. The freed-up money will go toward buying mortgages of struggling homeowners to enable them to refinance into more affordable loans.

The capital requirement for each company will be reduced from the current 30% to 20%, one person familiar with the discussions said. Under the deal, Fannie and Freddie will commit to raise additional capital. That could be done through special sales of stock or cuts in dividends. Together they will be expected to provide up to $200 billion in new funding for home loans, the person said.

People familiar with the matter spoke on condition of anonymity because the plan hadn't yet been made public.

OFHEO, the federal agency, was holding a news conference with its director, James B. Lockhart, Fannie Mae President and Chief Executive Daniel Mudd, and Freddie Mac Chairman and CEO Richard Syron.

Agency spokeswoman Stefanie Mullin declined to comment, as did Fannie Mae spokesman Brian Faith. Spokesmen for Freddie Mac couldn't immediately be reached for comment Tuesday evening.

The two companies together hold or guarantee around $4.9 trillion in home-loan debt. As the mortgage crisis and ensuing credit crunch have worsened in recent months, policy makers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages.

It would be the third step the government has taken in recent weeks to allow Washington-based Fannie and McLean, Va.-based Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.

The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

Influential Democratic lawmakers have been pushing for a reduction in the companies' capital-holding requirements. Bush administration officials and numerous Republican lawmakers, on the other hand, have long opposed allowing Fannie and Freddie to take on more debt, contending that doing so could threaten the global financial system.