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August 14, 2007 > Government rejects request by Fannie Mae and Freddie Mac

Government rejects request by Fannie Mae and Freddie Mac

By Marcy Gordon, AP Business Writer

WASHINGTON (AP), Aug 10 Mortgage finance giants Fannie Mae and Freddie Mac will not be allowed to take on more debt, the government said Friday, denying requests to relax the companies' investment caps as a way to pump cash into the struggling mortgage market.

The decision by the Office of Federal Housing Enterprise Oversight capped a week of speculation that buoyed the stock prices of the government-sponsored companies. Investors drove Fannie's share price 17 percent above last Friday's close, and pushed up Freddie's stock by 11 percent.

Meanwhile, with the U.S. home-loan markets in turmoil and credit drying up as a result, a mild panic has spread across the globe, knocking down key stock market indexes.

Democratic lawmakers and others made the case for federal regulators to ease the investment limits on Fannie and Freddie in order to provide much-needed liquidity in the market for mortgage-backed securities. The Bush administration, though, opposed the idea: President Bush insisted that a higher priority should be placed on tightening the oversight of Fannie and Freddie, which only a few years ago suffered multibillion-dollar accounting scandals.

OFHEO Director James B. Lockhart, the independent regulator charged with the decision, said Friday the risk of allowing the two companies to take on more debt at the moment was too great. Combined, Fannie and Freddie hold or guarantee two-thirds of all U.S. home mortgages. ``Their safety and soundness is of paramount importance,'' said Lockhart, adding that he could reconsider the decision later on.

It was Lockhart's agency that installed caps last year on the companies' mortgage investment holdings. Fannie's cap is set at $727 billion, Freddie's at $724 billion.

``The marketplace should have confidence that (the companies') securities are trading efficiently,'' Lockhart said in a statement.

Lockhart said Fannie and Freddie ``will remain active market participants'' in buying blocs of home mortgages from lenders and bundling them for sale to investors worldwide.

Fannie Mae's CEO Daniel Mudd said Friday that raising his company's investment portfolio cap by 10 percent ``would help to alleviate the ongoing credit crunch in the markets and bring an additional measure of stability.''

Earlier, the Federal Reserve announced that it will pump as much money as needed into the country's financial system, including $38 billion in temporary reserves injected Friday morning.

Shares of Fannie gained 53 cents to $66.46 on Friday, ending the week near the upper end of its 52-week trading range of $47.17-$69.94. Shares of Freddie rose 28 cents to $61.95, trading in the middle of its 52-week range of $54.97-$71.92.

Arvind Sachdeva, senior portfolio manager at Victory Capital Management, said he was skeptical all week about investors' apparent belief that regulators would ease the investment limits on Fannie and Freddie.

Sachdeva called it ``almost incomprehensibly ironic'' that Fannie and Freddie, criticized for years by many officials and lawmakers as posing risk to the financial system, were being viewed as the ``solution'' for the mortgage markets.

The mortgage markets in which Fannie and Freddie operate, marked by less risk, have not been as severely hit by the credit squeeze racking much of Wall Street.

Bush administration officials lauded OFHEO's decision.

``Currently, that market is active and functioning,'' Robert Steel, the Treasury undersecretary for domestic finance, said in a statement. ``The correct approach is to continue to watch this market closely and determine what further role (they) may play.''

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