Mortgage lenders to pump $200 billion into markets[Fannie Mae & Freddie Mac]

The two largest U.S. mortgage finance companies on Wednesday won approval to pump up to $200 billion into the distressed U.S. mortgage market, the latest step in government efforts to stabilize credit markets and save the economy from recession.

Policy-makers at the Federal Reserve, regulatory agencies and the Treasury Department have let loose a flood of measures to battle rising home foreclosures and stabilize shaky markets, but some still see the need for a more direct government hand.

The Office of Federal Housing Enterprise Oversight said it was immediately easing restrictions on Fannie Mae (FNM.N) and Freddie Mac (FRE.N) to give them a bigger role in settling queasy mortgage markets. It said they should be able to buy or guarantee about $2 trillion total in mortgages this year.

"All hands are on deck to try and prevent this U.S. situation from becoming a dire crisis," said David Watt, a currency strategist with RBC Capital Markets in Toronto. "They're doing everything they can, making policy on the fly."

Still, some on Capitol Hill and Wall Street want a government backstop to catch sliding home values and stem growing foreclosures.

Rep. Barney Frank, chairman of the powerful U.S. House of Representatives' Financial Services Committee, has proposed using the Federal Housing Administration to insure up to $300 billion of shaky home loans after lenders erase some of the mortgage amount.

The Massachusetts Democrat said on Wednesday the Bush administration seemed open to his plan but the Treasury later said it expressed "no interest" in negotiation over the proposal.

In a separate speech, one senior Treasury official said the Bush administration would reject big bailout plans or efforts that would change conventions in the mortgage finance system.

"We've heard of proposals that would create new bureaucracies and will take years to implement. We've also seen proposals that will cause mortgages to be more expensive for borrowers in the future," said Anthony Ryan, treasury assistant secretary for financial markets. "But these types of proposals will do more harm than good."

The Treasury Department did welcome letting Fannie Mae and Freddie Mac increase their mortgage holdings and the formula that relaxes the companies' reserves that they were forced to raise after accounting scandals came to light in mid-2003 and 2004. Reducing their reserve requirement is expected to free up about $200 billion.

OFHEO now says they will be required to hold only 20 percent more in reserves rather than 30 percent originally ordered, and OFHEO said it may consider more cuts.

Efforts to ease financial market stress helped bring down mortgage rates early this year, but they have risen in recent weeks as investors have dumped souring loans to meet margin requirements, undercutting the Fed's efforts to spur the economy by cutting overnight interest rates.

Shares of Fannie Mae and Freddie Mac, which rose sharply on Tuesday in anticipation of the announcement, blasted higher for a second day on Wednesday. Fannie Mae stock was up 10.3 percent in mid-afternoon at $31.12 and Freddie Mac was up 15.5 percent at $30.06.

The global nature of mortgage market problems was underlined as the Bank of England stepped in on Wednesday to dampen rumors that HBOS (HBOS.L), Britain's biggest mortgage lender, might be in trouble.

"No meetings have taken place or been scheduled to discuss problems with any institution in the UK," a BoE spokesman said, a rare step by the bank to comment on rumors.

In a joint statement with OFHEO at a news conference in Washington, Fannie Mae and Freddie Mac said they had promised to raise "significant capital" in return for easing the amount of reserves they have to keep on hand against potential losses.

The Treasury Department has been pushing Wall Street firms and others facing losses to quickly raise new capital. That is vital for a return to some kind of normal lending and business activity and to avert a full-blown financial meltdown.

Treasury Secretary Henry Paulson quickly endorsed OFHEO's actions to give Fannie Mae and Freddie Mac more running room, which gives them scope to do anything from buying up new home loans to refinancing existing ones or purchasing mortgage backed securities.

"Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," Paulson said.

Paulson, a pragmatic-minded veteran of Wall Street, has so far hewed to the administration line that it would not countenance a taxpayer-financed "bailout" for people who took excessive risks.

But that argument suffered over the weekend when Treasury helped broker a proposed deal for a takeover of troubled investment bank Bear Stearns.

President George W. Bush said on Tuesday the White House was monitoring financial markets and, if further actions were needed to ease mortgage woes, it would be done "in a way that does not damage the long-term health of our economy."

Until now, the Bush administration has argued the combined $1.4 trillion portfolios of Fannie Mae and Freddie Mac represents more risk to the U.S. financial system than help to homeowners. Its shift in attitude comes as falling home prices and increasingly jittery financial markets have put the U.S. economy at risk of a severe recession.

"It's good news," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi in New York. "A lot of mortgage originators have left the business, so it's a good thing that mortgage money will be made more available."

'The Office of Federal Housing Enterprise Oversight said it was immediately easing restrictions on Fannie Mae (FNM.N) and Freddie Mac (FRE.N) to give them a bigger role in settling queasy mortgage markets. It said they should be able to buy or guarantee about $2 trillion total in mortgages this year.'

Oh joy.

The simple equation here is mortgaged home prices, taken as a whole, collateralize much of the outstanding debt carried on the books of FRE, FNM, and dozens of investment banks. If home prices fall, the collateral is hampered. The additional funding jammed into the mortgage market is an attempt to prop up home prices. My contention is that home prices are, or should be, or have been for 75 years, roughly 3 times the median gross income, plus or minus a tad. Pricing above that benchmark is not supportable long term or even medium term. Lenders aren't any more willing to lend, in fact they have tightened lending standards. Lenders are in fact using these capital infusions and credit availabilities to bolster their balance sheets. And, mortgage rates have generally risen in response to the Fed's easing of rates. So I for one am not optimistic that these efforts will succeed despite the ongoing nationaliztion of the home mortgage market.

Mortgage brokers and the percentage commissions are part of the rotten root of this system.... make them wait for their commission until the loan has seasoned for 5 or 10 years.

Oh joy.

Yes, joy. Fannie Mae was up 25% yesterday and another 10% today in a down market. Freddie went up similar amounts. The government has been handicapping both with capital requirements that are way too high. They are now going to be reduced from 30% to 20%. It's still too high, but it's a start.

Why don’t they just BUY the houses for people. After all, isn’t housing is a human “right”, just like health care? Our idiot leaders are just digging us into a deeper hole to stave off the inevitable result of their PC, grow-at-any-cost policies. This whole thing is not going to end well.

isn’t housing is a human “right”, just like health care?

Yes, it is on the list of Human Rights. Implementation of the entire set of human rights would bury the entire planet in debt unto the last generation.

I guess I will have to hold onto my cash a little longer until the house of cards, finally does crumble. Was wanting to buy a house in 2008 but maybe now the prudent course is to wait until the propping-up effect has worn off. Maybe I can buy a nice place for $50K once everyone else is in debt up to their eyeballs.

Paulson, a pragmatic-minded veteran of Wall Street, has so far hewed to the administration line that it would not countenance a taxpayer-financed "bailout" for people who took excessive risks.

No, just a FED financed bailout of the "system." While a lot of folks have lost their fortunes and "sacred honor" [is that a concept on Wall-street], the rest of us have gotten stuck buying the worthless assets, and guaranteeing them to keep other counterparties in this fraud from losing their shirts.

As a condition of the deal JPM ought to have to back out of a lot of the derivatives business. There is probably a good argument for some of it, but not when the hedging strategies, far from hedging risk, cause the risk.

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