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Journalism of Courage
The US government today relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion of financing for home loans. The initiative, which will require Fannie and Freddie to raise substantial funds, is part of a broader government strategy to ease a credit crisis that has made it difficult for consumers and businesses to borrow, and spread fear throughout global financial markets.
The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, said the mandatory cash cushion for Fannie and Freddie – now nearly $20 billion for the two – will be reduced by a third under the new plan. The freed-up money will go toward buying mortgages of struggling homeowners, enabling them to refinance into more affordable loans.
The capital requirement for each company will be reduced from the current 30 per cent to 20 per cent, and further reductions will be considered in the future. Fannie and Freddie will raise additional capital through special sales of stock or cuts in dividends. It was the third step the government has taken in recent weeks to allow Fannie and Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year. 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.
The oversight agency estimated that the combination of these efforts should allow Fannie and Freddie to purchase or guarantee roughly $2 trillion (euro1.2 trillion) in mortgages this year. 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. “This is what (Fannie and Freddie) were put in place for. … And we will deliver,” Freddie Mac chairman and chief executive Richard Syron said.
