Fannie Mae and Freddie Mac are near a deal that would increase their ability to ease tight credit by broadening their ability to buy mortgages being shunned by other investors, sources familiar with the talks said on Monday.
The deal would see the largest providers of funds for U.S. residential mortgages win relief from a capital surcharge that has constrained their growth, while also issuing new preferred stock, sources said.
"It would be a big step forward" for the companies and the markets, said Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey.
"You are talking about the two biggest buyers of mortgages in an environment where mortgage products are relatively illiquid, and in need of buyers," he added.
The government-sponsored enterprises must hold 30 percent more capital than normal under a mandate imposed by their regulator after accounting scandals earlier this decade.
In recent weeks, policymakers in Washington have called for the companies to raise more capital in order to put more money into the housing market. Fannie Mae and Freddie Mac have resisted raising new capital as it would dilute the value of the companies.
But the financial crisis that on Sunday led to the fire-sale of No. 5 U.S. investment bank Bear Stearns Cos Inc. has underscored the gravity of the situation. Critics have raised pressure on the government to take unconventional measures to stabilize the banking system, especially since the economy appears to be sliding into recession.
A deal to boost GSE purchase and securitization activity "is important for the resumption of the re-opening of the credit markets," Lieberman said.
Shares of Fannie Mae rose 2.9 percent to $22.85 in extended trading after the close on Monday. Shares of Freddie Mac gained 3.1 percent, to $21.25.
The sources said the GSEs and the Office of Federal Housing Enterprise Oversight were working out details about how much capital relief the companies would win and how much preferred stock they would be expected to raise.
Such a deal would likely be preferable to the Bush administration than giving the companies or their bonds direct support of the U.S. Treasury, which was rumored this month, an executive at a California-based mortgage lender said.