Fannie, Freddie limits eased

The Baltimore Sun

WASHINGTON -- A federal regulator made it easier yesterday for mortgage giants Fannie Mae and Freddie Mac to absorb problem loans that are dragging down many U.S. homeowners, the latest of several measures designed to stabilize falling home prices.

The Office of Federal Housing Enterprise Oversight announced that it would lower the amount of capital that Fannie and Freddie must keep in reserve from 30 percent to 20 percent.

With less in reserve, the two government-sponsored enterprises will have an estimated $200 billion more available immediately to purchase troubled home loans.

Despite promises otherwise, mortgage lenders and loan servicers have moved slowly to modify or refinance loans to homeowners who are behind on their payments. One in 20 home loans nationwide is past due, according to the Mortgage Bankers Association.

Yesterday's move by the regulatory agency of Fannie Mae and Freddie Mac seeks to provide a backstop to lenders. If the stressed loans are modified, Fannie and Freddie are better able to purchase and bundle them with other home loans to offer to investors as mortgage bonds.

"Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year," said James B. Lockhart, the regulatory agency's director. "We believe they can play an even more positive role in providing the stability and liquidity the markets need right now."

The news is particularly important to California and other states with high home prices. Fannie and Freddie would be freer to absorb many of the so-called jumbo loans that until recently were too high-priced to be in their portfolios.

Sen. Charles E. Schumer, the New York Democrat who serves on the Senate finance and banking committees, praised yesterday's action as a "significant first step."

"The bull's eye of this crisis is still housing," Schumer said on Bloomberg Television. "Today's announcement gives a real shot in the arm to the idea that maybe we can get a handle on the foreclosure crisis."

Yesterday's action follows a move by Congress last month to raise the loan size that the Federal Housing Administration can underwrite, and it temporarily raised the cap on loan prices that Fannie and Freddie can absorb.

In both cases, the maximum loan amount that can be underwritten by FHA and packaged by Fannie and Freddie into mortgage bonds is now $729,750. That's up sharply from the previous limit of $417,000.

Subprime loans for borrowers with weak credit histories played a major role in the nation's credit crisis. One in five subprime adjustable-rate loans are delinquent, according to the Mortgage Bankers Association, and foreclosure starts are especially rampant in California and Florida.

Many of these ARMs rise this year to rates that borrowers can't afford. Treasury Secretary Henry M. Paulson Jr. has urged lenders to freeze these loans at their starter rates.

Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corp., which regulates national banks, has called on lenders to refinance borrowers into fixed-rate loans with lower rates.

Federal Reserve Chairman Ben S. Bernanke has urged lenders to take losses and place borrowers into lower-cost loans to halt foreclosures, which are at record levels and are helping to drag down the values of homes whose owners are making their payments.

"This should help keep some at-risk borrowers in their homes, which will help stabilize the real estate market," Kieran Quinn, the president of the Mortgage Bankers Association, said in a statement supporting the easing of the reserve requirements for Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac will be assuming greater risks, since home prices are declining in many parts of the country after a five-year housing boom.

The action could put a new floor under home prices, making them level off. But if prices continue dropping, Fannie Mae and Freddie Mac may be left holding loans that are worth less than the homes they're financing, the very situation that private-sector lenders have found themselves in over the past year.

Although the Office of Federal Housing Enterprise Oversight lowered the capital requirements for Fannie and Freddie, the chairman of the oversight agency said there would be an adequate cushion of money in the bank for both enterprises, which are congressionally chartered but operate in the private sector.

The Associated Press contributed to this article.

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