About $200 billion (£99.6 billion) of extra mortgage financing is to be made available to would-be homeowners in the United States after a key regulator reduced the amount of capital that the two biggest housing financiers must hold in reserve.
The Office of Federal Housing Enterprise Oversight has reduced the so-called capital surplus requirement on Fannie Mae and Freddie Mac from 30 per cent to 20 per cent. This will translate into a $200 billion liquidity injection, the agency said.
Fannie Mae and Freddie Mac buy home loans from mortgage lenders and package them into bonds, guaranteeing the interest and principal payments in the event of a default. They make the bulk of their money from the fees that they receive for insuring the bonds, while they also hold some of the securities they create on their balance sheets as investments.
The two groups are a significant source of mortgage financing for Americans, owning or guaranteeing 40 per cent of the country’s $11,500 billion outstanding home loans.
Reducing the amount of capital that Fannie Mae and Freddie Mac are required to hold in reserve frees up additional cash for them to spend on buying home loans from the mortgage lenders. The mortgage lenders can then use the proceeds from the sale of those home loans to make fresh loans.
Henry Paulson, the US Treasury Secretary, said that he was “encouraged” by the agency’s move to reduce the capital restrictions. “Additional capital will enable both the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market,” Mr Paulson said.
The capital surplus on Fannie Mae and Freddie Mac was put in place by the enterprise office – an agency within the Department of Housing and Urban Development – several years ago in the wake of accounting problems at both groups.
It required them to hold nearly a third more cash than their usual minimum while they worked to resolve lapses in their accounting and internal-risk controls, which have largely been addressed.
In return for the agency’s capital surplus reduction, the two groups have agreed to raise significant quantities of additional cash, expected to amount to several billion dollars each.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said: “Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year.
“Both companies have prudent cushions above the capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity that the markets need right now.”
Daniel Mudd, the chief executive of Fannie Mae, added that there was no “magic bullet” to solve the housing crisis, but he said that moves by the federal Government were “starting to have an effect”. The Government’s initiatives include coordinating an agreement among mortgage lenders to freeze the interest rates on some “adjustable rate” home loans that were due to reset at a higher rate this year. The Government has also arranged a $150 billion economic stimulus package, much of which is made up of tax rebates.
Fannie Mae and Freddie Mac face a surge in claims on the bonds that they underwrite as defaults on the underlying home loans have continued to soar.
As a result, both groups recorded declines of more than two thirds in their share price in the seven months to the start of this week.
Fannie Mae’s shares, which climbed by 27 per cent on Tuesday, in anticipation of the restriction in capital requirements, rose a further $2.49 by the close yesterday to $30.71. Freddie Mac’s shares, which climbed by 26 per cent on Tuesday, added $3.88 by the close, ending the day at $29.90.
Source: Times online