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Deal for More Fannie and Freddie Loan Power Expected

The regulator for Fannie Mae and Freddie Mac will on Wednesday announce that the two U.S. mortgage finance companies have won relief from stringent capital rules and so can pump about $200 billion into a shaky mortgage market, sources familiar with the plan said on Tuesday.

A foreclosed home for sale.
David J. Phillip
A foreclosed home for sale.

The Office of Federal Housing Enterprise Oversight will hold a joint press conference with Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron at the regulator's Washington offices to announce the deal at 9 a.m. New York time.

Under the agreed-to plan, the two companies will be permitted to use some of their capital reserves to soak up mortgage assets while pledging to raise equity capital -- probably in the form of preferred stock -- in the near future.

A source familiar with the deal said the companies would be granted on the order of $200 billion in new mortgage-buying power, which amounts to a one-third reduction in their excess capital.

Shares of the two government-sponsored companies soared on Tuesday on expectations they were near a deal with OFHEO that would allow them to expand their support of the mortgage market.

At the close in New York, Fannie Mae's stock rose 27.06 percent to $28.22, marking the biggest one-day percentage gain in at least a quarter-century. Freddie Mac shares climbed 26.19 percent, the best percentage boost since 1988, to $26.02.

The deal would roll back OFHEO demands that the nation's two largest sources of mortgage finance hold 30 percent more capital than typically required. That constraint was put in place several years ago after accounting scandals shook both companies.

Increased investment by Fannie Mae and Freddie Mac is expected to bolster confidence in a secondary mortgage market shaken by a wave of failing home loans. Cratering prices and a sell-off of mortgage-related assets this year have worsened the credit crunch, which may be tipping the U.S. economy into recession.

But the companies, which hold charters from the government to support homeownership, are themselves struggling with losses due to falling home prices and record home foreclosures.

Both recently boosted forecasts for their credit losses into 2009 after reporting combined net losses of $6.1 billion for the fourth quarter of 2007.

The companies' political allies in Washington have called for OFHEO to loosen the reins on the two government-sponsored enterprises. On Tuesday, Sen. Charles Schumer, a New York Democrat, wrote a letter to OFHEO Director Lockhart requesting the companies be given meaningful capital relief.