Shares of Fannie Mae and Freddie Mac, the largest providers of money for U.S. home mortgages, jumped as much as 10% on Monday on speculation that regulatory restrictions limiting the size of their portfolios might be lifted.
Lifting current limits could allow the companies to dramatically boost their combined $1.4 trillion investment portfolios, which provide some three-quarters of revenue for the government-sponsored enterprises, or GSEs.
With their buying power and goals to promote homeownership, the companies could help stave off a budding credit crunch caused by a crisis in subprime mortgages, analysts said.
Currently, Fannie Mae and Freddie Mac are limited in how much they can increase their mortgage holdings due to limits negotiated between the companies and their regulator, the Office of Federal Housing Enterprise Oversight, in response to failures in financial reporting and more than $11 billion of accounting errors at the companies.
"There have been indications that the market thinks that their portfolio limits will be lifted," said Jim Vogel, an analyst at FTN Financial Capital Markets in Memphis, Tennessee.
Freddie Mac has said it expects to discuss removal of portfolio limits once it re-establishes the quarterly schedule of financial reports that was thrown off by its earnings restatement in 2003. The company has resumed quarterly reports, but Freddie Mac spokesman Michael Cosgrove declined to comment if talks had begun.
"Maybe the government regulators will allow them to grow their portfolio now in a way they couldn't before, across the board, for jumbo, subprime and conventional loans," said Lee Delaporte, portfolio manager at Dreman Value Management in Jersey City, New Jersey, which has more than $20 billion of assets, including Fannie Mae and Freddie Mac shares.
Fannie Mae and Freddie Mac are a combined $34 billion below their regulatory caps, according to June reports from the companies. Although $10 billion to $14 billion gets paid down monthly, "there is limited scope for new additions to their portfolio," according to a Lehman Brothers report.
"We're not going to have any comment on this," an OFHEO spokeswoman said. A Fannie Mae spokesman declined to comment.
OFHEO last month limited the GSE's potential scope in the market for subprime loans that has been torn apart by loose lending standards, rising delinquencies and losses to banks and investors. The companies can not buy the bulk of subprime mortgages outstanding under the OFHEO directive to avoid loans that do not conform to new federal lender guidance.
Any increase in the buying capacity of the companies may also be against the wishes of the Federal Reserve, which for years has warned that trading in the portfolios could upset the entire financial markets -- and U.S. economy -- because of their size. Fannie Mae and Freddie Mac claim the portfolios help stabilize the markets and lower mortgage rates by boosting investor confidence in the system.
Fed Chairman Ben Bernanke on July 19 said increasing the size of the portfolios increases risks to the financial markets and pending legislation on GSE oversight does not strengthen the regulator enough.