- The Washington Times - Thursday, March 20, 2008

Regulators yesterday loosened constraints on Fannie Mae and Freddie Mac so they can purchase up to $2 trillion of mortgages this year in a policy reversal that reflects increasingly urgent efforts to stanch the mortgage crisis.

The Bush administration and congressional Republicans for years have been arguing that Fannie and Freddie should cut back their presence in the mortgage market to reduce the potential risks to taxpayers from a perceived federal guarantee on their mortgages.

But the implosion of the private mortgage market in the past six months has left Fannie and Freddie as the only major source of funding for mortgages today, forcing the administration to back away from its long-held stance.

Yesterday, the administration not only agreed to allow more purchases of risky mortgages by Fannie and Freddie without increasing their capital, but also said they could do so without first submitting to a strict regulatory regime as they previously insisted.

“It’s a comment on the burgeoning panic in Washington,” said Joshua Rosner, managing director at Wall Street firm Graham Fisher & Co., noting that the decision to unleash Fannie and Freddie was made by top administration officials involved in the bailout of Bear Stearns and other emergency actions in the past week.

“Concerns about the extreme fragility of the financial system are foremost in their minds,” he said, but like many analysts, he questioned how much good it will do in a credit market that remains largely frozen in place amid rising defaults and monumental losses among lenders.

Markets continued to churn yesterday despite the strenuous and unprecedented string of actions by the Federal Reserve and administration in the past week, with the Dow Jones Industrial Average plunging 293 points only a day after posting a 420-point gain, which was its best in five years.

One item triggering the turmoil yesterday was a warning from one of the only lenders still offering jumbo mortgages of more than $417,000 to people buying high-priced homes — Thornburg Mortgage — that it may go bankrupt because it has been unable to find buyers for its mortgages. Thornburg has had to hold onto the mortgages it’s made since the jumbo market dried up in August, and it has been in a constant scramble for funding.

Thornburg is an example of a lender who cannot benefit from the spigot of cheap money that the Fed has opened up for banks and brokerages, so the announcement highlighted the limits of the Fed interventions, as well as the still-extreme wariness among investors about buying even prime mortgages that bear higher default risks.

“None of the actions have addressed the underlying problem of illiquid and unmarketable assets that continue to be stranded in the sixth level of purgatory,” Mr. Rosner said. He added that the Fed has now waded into the treacherous mortgage market by offering to temporarily warehouse the unwanted mortgages held by brokers and banks in exchange for cash or Treasury securities.

“There’s been a huge revolution in the way the Fed and the Treasury view” Fannie’s and Freddie’s role in the credit markets, said Margaret Kerins, a strategist at RBS Greenwich Capital Markets. “They moved from wanting them to support the mortgage market only through securitization, to now supporting them in their role as a buyer of last resort.”

Office of Federal Housing Enterprise Oversight Director James B. Lockhart III said he expects the companies to continue to raise capital from investors to bolster their finances even as he reduced their surplus capital requirement to 20 percent from 30 percent, which he said would enable them to quickly pump another $200 billion into mortgage purchases.

“It’s critical for them to have additional capital,” he said. “These companies are safe and sound, and we’re going to ensure by our everyday oversight that they continue to be safe and sound.” Fannie and Freddie raised $7 billion and $6 billion, respectively, through stock offerings in recent months.

Sen. Richard C. Shelby, Alabama Republican, said he was not ready to give up the fight to curb the power of the enterprises.

“While Senator Shelby understands the desire to allow Fannie Mae and Freddie Mac more flexibility in providing liquidity to the mortgage markets, he questions the wisdom of doing so outside the context of comprehensive and meaningful reform,” said spokesman Jonathan Graffeo.

Democrats on Capitol Hill who have urged the liberalizing move for months declared victory.

“This is a major step forward that should help mitigate the spread of foreclosures and provide some relief to the credit markets,” said Sen. Charles E. Schumer, New York Democrat. “Fannie and Freddie ought to now become more involved in distressed areas of the market, like jumbo loans and subprime refinancings.”

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