Fannie Mae and Freddie Mac to Increase Lending by 200 Billion

Fannie Mae and Freddie Mac to Increase Lending by $200 Billion

March 19, 2008

In the latest move by the government to fix the mortgage crisis, restrictions on Fannie Mae and Freddie Mac have been eased. The Office of Federal Housing Enterprise and Oversight (OFHEO) reduced the capital requirements from 30 percent to 20 percent. The measure will provide Fannie and Freddie with an extra $200 billion for the mortgage backed securities market. That extra capital will allow the two firms to purchase or guarantee $2 trillion in mortgages this year.

The two companies have a total mortgage loan portfolio and guarantees of $4.5 trillion. The $2 trillion addition is a significant expansion of their role to stabilize the housing market. The measure is expected to help lenders provide loans at a lower rate of interest. Lending and interest rates have risen as many subprime loans have defaulted.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” said James B. Lockhart, OFHEO director. “We believe they can play an even more positive role in providing the stability and liquidity the markets need right now.”

Just last month the Congress passed a stimulus package that included a temporary increase on the limits that Freddie and Fannie can purchase. The $417,000 cap was raised to $729,000 for the highest cost markets.

The current mortgage crisis has forced many lenders out of business and forced others to reduce the number of loans they will make. Falling home prices and a record number of foreclosures have decreased the value of mortgage securities decreasing the availability of new loans. The combination of factors has created a drastic reduction of liquidity in the mortgage market. The aggressive actions by the government are meant to help restore liquidity and the normal functioning of the mortgage market.