Fannie Mae Wants Higher Mortgage Cap
Amid growing distress in the home mortgage market, home loan finance giant Fannie Mae is asking federal regulators to raise the limit on the amount of mortgage securities it is allowed to hold as investments.
Fannie Mae’s request to the Office of Federal Housing Enterprise Oversight boosted the government-sponsored company’s stock $5.87, or more than 10 percent - its biggest gain in two decades.
Fannie Mae, which finances one of every five home loans in the U.S., was ordered last year to keep its mortgage loan holdings at or below a fixed level, now around $727 billion, in the wake of an accounting scandal that erupted in September 2004.
The mortgage company is asking for the cap on its holdings to be raised as a way to provide more cash for the stretched home loan market.
Falling home prices and a spike in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans.
On Monday, American Home Mortgage, once the 10th-largest U.S. mortgage lender, filed for bankruptcy protection and two other lenders said they were not accepting new applications - signs that the worst housing-market crunch in decades could be widening.
Freddie Mac, which is Fannie Mae’s smaller government-sponsored sibling in the $8 trillion home loan market, also is subject to such limits on its mortgage portfolio.
The two companies pump money into the mortgage market by buying home loans from lenders and then bundling them into securities for sale on the secondary mortgage market.
Fannie Mae’s request to raise its limit was reported by The Wall Street Journal.
Under an order signed with Fannie Mae, the cap on the company’s mortgage portfolio can be raised by a “moderate” amount under certain circumstances, including lack of liquidity in the market. OFHEO Director James B. Lockhart would have 60 days to make a decision.
Lockhart said Fannie Mae and Freddie Mac have made progress in correcting serious financial weaknesses - deficiencies that led the government to push for restraints on growth in their portfolios - but that they still face problems and have a distance to go.
Fannie Mae spokesman Brian Faith declined to comment, as did Stefanie Mullin, a spokeswoman for OFHEO.
Michael Cosgrove, a spokesman for Freddie Mac, said, “We continue to operate under our voluntary growth limit.”
He added: “There is room for us to grow the portfolio if market conditions warranted.”
Freddie Mac’s mortgage holdings stood at $703.3 billion as of June 30, and they could rise as high as $724.5 billion under the company’s limit, according to Cosgrove.
“We’re very anxious to begin talks with our business partners and our regulator to discuss ways that we can bring additional liquidity to the market,” he said.
Fannie Mae and Freddie Mac in April announced plans to purchase tens of billions of dollars worth of bad credit mortgages to help borrowers with high-priced loans keep their homes.
They are offering mortgages with longer fixed-rate terms so lenders can help subprime borrowers qualify for mortgage refinancing and get out of high-interest adjustable rate mortgages.
At the same time, the companies have tightened their policies for buying subprime home loans from lenders. Their new policies, which take effect September 13, call on lenders to use caution in making high-risk loans and to evaluate more carefully borrowers’ ability to repay them.
SOURCE: Forbes