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Fannie and Freddie Allowed To Buy More Mortgages

The federal regulator for Fannie Mae and Freddie Macsaid Wednesday it would lift restrictions later this week on the amount of mortgages the government-sponsored companies can hold on their books.

Shares of Fannie and Freddie rose even after Fannie reported a nearly $3.6 billion loss in the fourth quarter of 2007amid rising home-loan delinquencies.

The Office of Federal Housing Enterprise Oversight, acting after Fannie Mae published audited financial results for 2007 on Wednesday morning, said the two companies' mortgage investment limits, currently at around a combined $1.5 billion, would be lifted effective Saturday. Freddie Mac is due to report is financial results on Thursday.

The caps were imposed in 2006 in response to the companies' multibillion-dollar accounting lapses, thereby limiting their participation in the market for securities backed by home mortgages.

James B. Lockhart, director of OFHEO, said in a statement that the filings are "an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements."

Last fall, Democratic lawmakers had urged the government to lift those limits as a way to ease mortgage-market turmoil. Regulators allowed an increase, but it was smaller than those lawmakers advocated.

(See an exclusive video interview on Fannie Mae and Freddie Mac with Office of Federal Housing Enterprise Oversight Director James Lockhart at left.)

The government, however, did not lift a government mandate that requires Fannie and Freddie to keep reserves to guard against losses of 30 percent above the minimum legal requirement.

Lockhart said he will discuss with Fannie and Freddie a "gradual decreasing" of that requirement. But he noted that it has put the two companies in a better position to cope with "volatile market conditions and (Fannie and Freddie's) significant losses."

Fannie Mae on Wednesday said it lost nearly $3.6 billion in the fourth quarter of 2007 as home-loan delinquencies mounted and the company preserved cash in anticipation of further losses. The quarterly loss at Fannie, the largest U.S. buyer and backer of home loans, contrasts with a profit of $604 million in the same period a year earlier.

The news also had an impact on the broader market.

""News that OFHEO will lift the caps for Fannie Mae and Freddie Mac has contributed to the sell-off in the US Treasury market that seemd to have already been reversing in the wake of the equity market recovery," said Marc Chandler, head of Global Currency Strategy at Brown Brothers Harriman, in New York.

According to Ralph Manigat, an analyst at 4Cast in New York, the change in the caps will reeduce the risk in the mortgage market.

Still, this is unlikely to be a quick fix.

Some analysts said that until more is known about how Freddie Mae and Freddie Mac will utilize their newfound investment flexibility, there will be little impact on mortgage rates, which have risen despite a series of aggressive rate cuts from the Fed.

"In a mortgage market where lack of liquidity has been a recurring issue in recent months, this is a positive step," said Greg McBride, senior financial analyst at Bankrate.com. "But it's unlikely to result in wholesale changes in mortgage rates overnight, and the impact will probably come at a gradual pace."

--Reuters and the Associated Press contributed to this report.

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