OFHEO Gives GSEs More Breathing Room on Portfolio Caps

Today the Office of Federal Housing Enterprise Oversight said it will change how it calculates the portfolio caps in place for each of the GSEs, as well as looking to bring Fannie Mae into parity with Freddie Mac regarding annual portfolio increases.

From the Wall Street Journal, a quick summary:

In May 2006, Ofheo capped Fannie Mae’s portfolio at $727 billion because of the company’s past accounting problems. But Ofheo’s new policy would allow Fannie Mae to grow its portfolio 0.5% per quarter, or no more than 2% in one year. Ofheo has a similar growth structure agreement in place with Freddie Mac, which like Fannie Mae is a government-sponsored enterprise.

Ofheo said it will set the portfolio cap for both companies at $735 billion, effective July 1, 2007. Both companies will be allowed to grow 2% annually from this level beginning in the fourth quarter. In the fourth quarter, they will be allowed to grow 1.0%, though Ofheo said the 2% annual cap would remain.

(Side note: Ofheo? Like Oreo? Really?)

Beyond the percentages, the OFHEO also said it will change how portfolio caps at each company are calculated — ditching the current GAAP number (a balance sheet number) to adopt the use of Unpaid Principal Balance (UPB) instead. A UPB-based calculation would be less senstive to daily market fluctuations that currently force each GSE to stay well below formal cap limits, the OFHEO said in its statement.

It’s clear that many on Capitol Hill interpreted today’s move as a signal to start actively pushing to have the portfolio caps lifted entirely, however, with numerous outlets reporting that Sen. Chuck Schumer (D-NY) was more than willing to take credit for today’s changes.

“Whatever they call it, there is no doubt that this is an increase in the portfolio caps that I have been calling for,” Schumer is quoted as saying in numerous media outlets.