Fannie, Freddie Plan to Buy Jumbo Mortgages

The CEOs of Fannie Mae and Freddie Mac told CNBC that said some of the money made available to the home-financing market due to looser capital rules will go toward the so-called jumbo mortgage market.

Earlier, the Office of Federal Housing Enterprise Oversight lowered the capital requirement on government-backed mortgage lenders Fannie Mae and Freddie Mac to 20 percent from 30 percent, a move that will provide up to $200 billion in immediate liquidity for stressed mortgage markets.

A key to getting this regulation lifted was that Fannie Mae and Freddie Mac “did actually produce ‘07 financial accounts on a timely basis,” said OFHEO Director James Lockhart. (See CNBC interview with Lockhart at left.) “They now have the proper systems and controls … proper risk management … We think it really is a time that they can help the mortgage market in a big way,” Lockhart said.

"This initiative today will help move ... mortgage rates down," Lockhart said. "I think we'll see a lot of refinancing." But, in cases where homeowners can't refinance, Lockhart said Fannie, Freddie, banks and other companies "need to be more aggressive on ... loan modifications and even partial writedowns on those loans."

"Our first priority is to make sure there are good flows and good liquidity in the conventional conforming market," Daniel H. Mudd President, Fannie Mae's chief executive officer, said in an interview with CNBC.

Mudd wouldn't specify where exactly the company planned to invest first, but added that "there are additional pockets of liquidity out there," noting that the jumbo market, which provides loans for expensive homes, and the subprime market "present areas of opportunity for investment capital."

(See more from Mudd in the video at left.)

"We'll take our lumps along with the rest of the market," Mudd said. "We're playing some defense, but also some offense."

Freddie Mac CEO Richard Syron said his company has already notified its originators of its intention to buy jumbo conforming loans. "We're first going to focus on the mortgage-backed securities sector ... because it's important that those spreads return to normal so that, not only do people in the subprime sector, but people in the conforming market, are able to continue to benefit from the lower interest rates." Syron said the firm will be "quite aggressive" in the conforming jumbo market and that it also has some efforts to help out in the subprime sector.

Lockhart said he thinks that more can be done in the conventional mortgage market and that this capital will help these home-financing companies as they get into the jumbo market. Plus, “there’s a lot more that could be done in the subprime market,” Lockhart said, including refinancing people into safer mortgages and making modifications to loan agreements.

As for how long the housing slump will go on, Mudd noted that, from peak to trough, average home prices typically go down 13 to 17 percent. There was about a 3 percent drop last year, and a 5 to 7 percent decline projected for this year. "We think that means that the average home price in the country is going to continue to go down this year and into next year," Mudd said.

It's too early to say we've seen the worst, Syron said, but the CEOs remained optimistic. (Interview at left.)

"I'm starting to think that maybe momentum is at least starting to turn a little less negative," Syron said.

"We think with this liquidity, we can start to make a dent in the problem," Mudd said.

Shares of Fannie Mae and Freddie Mac rallied on the OFHEO announcement, gaining 8.8 percent and 15 percent, respectively.