OFHEO Loosens Capital Surcharge on Fannie, Freddie in Attempt to Jumpstart Mortgage Market

The Office of Federal Housing Enterprise Oversight said Wednesday morning that it had eased a key capital requirement for both Fannie Mae and Freddie Mac, as Federal regulators grapple with how to restore liquidity to a frozen mortgage market. Both GSEs have been subject to an OFHEO-imposed 30 percent capital surplus requirement that required capitalization above statutory limitations, one of the few remaining vestiges of an $11.3 billion accounting scandal that rocked financial markets nearly three years ago.

Wednesday morning, OFHEO said it would reduce the capital surcharge to 20 percent at both GSEs, and hinted that further reductions would likely be coming in the future. The looser capitalization requirements are expected to provide up to $200 billion of extra liquidity to the mortgage market, according to a press statement by the GSE regulator.

They’re also a cause for concern, since capital is critical in the current market.

Both Fannie and Freddie, as a result, said they will begin the process to raise significant capital — despite earlier assertions by executives at both companies that further capital was not needed. While the amount of capital to be raised is not yet known, some analysts have projected that each GSE will need to raise $10 billion dollars as their role in the mortgage markets appears set to expand dramatically.

All of which means that, at the end of the day, loosening the capital surcharge may end up having the somewhat strange effect of actually increasing capitalization levels at both Fannie and Freddie.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” said OFHEO director James Lockhart. “Let me be clear – both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity the markets need right now.”

OFHEO said that it expects that looser capitalization requirements and the release of the portfolio caps that had limited the growth of each entity’s retained portfolio — announced in February — should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. This capacity will permit them to “do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas,” the regulator said.

“We are working with our customers, regulators and policy makers to minimize foreclosures, increase affordability – and as of today – to restore liquidity in the market,” said Danied Mudd, Fannie Mae’s CEO. “This progressive, sustainable plan will help bring the stability the market needs.”