Seeking to boost the economy by making mortgages cheaper and easier to get, the government said Wednesday that it would further ease the reins on Fannie Mae and Freddie Mac. The move is intended to make as much as $200 billion in additional money available for newly issued home loans.
But some experts said the action would do little to boost the housing market or help homeowners who were struggling with their mortgages and were unable to refinance.
For The Record
Los Angeles Times Saturday, March 22, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 59 words Type of Material: Correction
Mortgage funding: An article in Business on Thursday about a regulator's decision to ease capital requirements on Fannie Mae and Freddie Mac said the Federal Housing Administration would start buying large mortgages. The FHA insures mortgages but doesn't buy them. The agency soon will insure home loans for as much as $729,000 in high-cost areas such as Southern California.
The federal regulator of Fannie and Freddie, which buy home loans and guarantee bonds backed by mortgages, said it was reducing their required capital cushion against losses. The move could stimulate home purchases or refinances within a month or two, executives at the government-sponsored firms said.
The action by the Office of Federal Housing Enterprise Oversight followed steps taken by the Federal Reserve and the Bush administration to stabilize the financial system and jump-start the moribund housing and mortgage markets.
Joshua Rosner, managing director at investment research firm Graham Fisher & Co., told investors in an e-mail that the steps showed "the burgeoning panic in Washington."
"Within the past 48 hours we have seen the administration decide to throw out all the rules in the rule book," Rosner said.
Experts said the latest moves might embolden some lenders to make more 30-year fixed-rate loans by giving them confidence that Fannie and Freddie would have the capacity to buy them. Most banks won't keep long-term mortgages on their own books because they can lose money on the loans if interest rates rise.
However, the actions don't address the threat to the economy posed by millions of homeowners with adjustable-rate loans who have little or no home equity, don't earn as much as their loan applications indicated or both.
"We are finding that folks really did misrepresent their income to get into a house or to get money out of a house they already owned," said Babette E. Heimbuch, chairwoman and chief executive of FirstFed Financial Corp., parent of First Federal Bank of California, a Santa Monica-based adjustable-rate lender.
"So they won't qualify for the loan they now need," she said. "In essence if they refinanced their house and are now losing it to foreclosure, they actually sold their house to the bank for more money than they could get in the market for it today."
Bank consultant Bert Ely of Arlington, Va., said Wednesday's action "will not have any material effect on a housing market that still is going through a much-needed housing price deflation."
Late last month, the government lifted a limit of $1.5 trillion on the combined total of mortgages that Fannie Mae and Freddie Mac could hold on their books. Fannie and Freddie, which had been limited to buying mortgages of $417,000 or less, also have been authorized temporarily to purchase loans of as much as $729,000 in high-cost areas such as Southern California, but they have yet to begin doing so. The Federal Housing Administration also will begin buying such large loans for the first time.
The regulator's action Wednesday reduces to 20% from 30% the amount of extra capital the companies must hold as a buffer against losses under a provision imposed when they nearly collapsed as a result of improper accounting several years ago.
At a news conference in Washington, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, noted that Fannie and Freddie were founded in the wake of the Great Depression to stabilize the mortgage market by buying and holding loans in good times and in bad. The recent constraints made that mission more difficult, he said.
Richard Syron, chairman and CEO of Freddie Mac, noted that the price of mortgages to consumers remained far above the costs to mortgage lenders because of the fear of defaults that had gripped the market.
"This is what [Fannie and Freddie] were put in place for, to deal with situations like this," he said at the news conference. "And we will deliver."
Shares of Fannie and Freddie surged on the regulator's decision. Fannie jumped $2.49, or 8.8%, to $30.71. Freddie shot up $3.88, or 15%, to $29.90. Both stocks are down more than 40% in the last year.
In some good news for consumers, interest rates on traditional loans sank this week. Bankrate.com, a consumer-oriented website, said the average rate on a 30-year fixed-rate mortgage of $417,000 or less had fallen to 5.98% on Wednesday from 6.39% last week.
But rates on mortgages of more than $417,000 remained stuck at high levels, reflecting the scarcity of loan buyers other than Fannie and Freddie, and the premium in interest these private buyers were demanding. The rates on such "jumbo" loans fell only slightly, to 7.43% from 7.6% last week, Bankrate said.
Mark Zandi, chief economist of consulting firm Moody's Economy.com, said Fannie, Freddie and the FHA were likely to start buying loans bigger than $417,000 in four to eight weeks.
"The rates you're seeing now are offered by private mortgage lenders," he said. "As soon as Fannie, Freddie and the FHA step in you'll see a lot of [jumbo] mortgages start flowing at lower rates."