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Fannie Mae, Freddie Mac Subprime Restrictions Ease

Fannie Mae and Freddie Mac, the biggest sources of U.S. housing finance, can buy $20 billion more in subprime mortgages under rules unveiled Wednesday to help revive a market hindered by tighter lending standards.

The Office of Federal Housing Enterprise Oversight, the regulator for Fannie and Freddie, agreed to relax restrictions on the mortgage finance companies' investment holdings although it did not eliminate existing caps on those loan portfolios.

The moves are meant to help Fannie and Freddie "provide greater assistance to subprime borrowers and others who may have trouble refinancing their existing mortgages," OFHEO director James Lockhart said in a statement.

He added that he will not allow "any major increases in the [investment] portfolio levels."

The regulator agreed to let both Fannie and Freddie buy more subprime loans and eased Fannie's investment limit to the level imposed on Freddie. OFHEO also agreed to eliminate some stringent bookkeeping measures that also constrained investments valued at a combined $1.4 trillion.

Subprime loans are extended at high interest rates to borrowers with risky credit. The companies' allies in Washington have for months called on OFHEO to give Fannie and Freddie more investment freedom so that they can buy the subprime loans shunned by other investors.

Both Fannie and Freddie have pledged to increase their subprime investments and OFHEO's move Wednesday "will enhance each enterprise's ability to purchase or securitize, over the next six months, up to $20 billion or more" of troubled mortgages, Lockhart said in a statement.

While both companies welcomed the news, they said they needed more freedom to buy home loans and help stabilize the roiling market.

"We still believe the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10 percent, so that we can more fully address the ongoing turmoil and bring much-needed liquidity to the mortgage market," said Brian Faith, a Fannie spokesman.

OFHEO's move would only allow the companies' investments to grow 2.9 percent larger than the current portfolio size and restrict the growth to troubled loans often made to low-income homeowners.

David Palombi, a Freddie Mac spokesman, said OFHEO's move did little more than ratify an earlier pledge by the company to increase its subprime investments.

"We believe that more should be done at this moment to help alleviate the current mortgage credit crunch," Palombi said in a statement.

While the new rules mean more investment freedom for Fannie and Freddie, it does not amount to an investment bonanza, said Jim Vogel, who tracks the companies for FTN Financial in Memphis, Tenn.

"At this point, we're reluctant to say this frees [Fannie and Freddie] to buy tens of billions of new conforming assets," he said in a note to clients.

Conforming loans are those that do not exceed $417,000 and includes both prime and subprime.

The move is not likely to quiet calls from some lawmakers who want OFHEO to eliminate the investment caps that were imposed on Fannie and Freddie in the wake of accounting scandals.

"The GSEs certainly need more room to grow their mortgage portfolios. ...But an increase this small doesn't respect the magnitude of this crisis," Senator Charles Schumer, a New York Democrat and member of the Senate banking panel, said in a statement Wednesday.

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