NEW YORK (CNNMoney.com) -- Federal regulators said Wednesday they would allow mortgage finance giants Fannie Mae and Freddie Mac to reduce the capital they are required to keep on hand, a move that could pump $200 billion into mortgage markets.
The rule change was announced by the Office of Federal housing Enterprise Oversight, (OFHEO), a normally low-profile agency which sets rules for the two government sponsored companies that between them hold or guarantee nearly $5 trillion in mortgages.
Both firms have been working in recent years to clean up accounting problems. During that process, the agency has been requiring them to keep 30% extra capital in reserve. The rule change allows them to reduce that excess capital to only 20%.
In the meltdown of the market for mortgage-backed securities over the last year, the securities backed by the so-called conforming loans that met Freddie (FRE, Fortune 500) and Fannie (FNM) loan criteria were considered the gold standard. But those loans could not be made to borrowers who had less than top credit scores, those who did not have significant equity in their home or who needed loans for more than $417,000.
Congress recently raised the limits for the loans that Fannie and Freddie can buy or insure, increasing the risks for the firm and the demands on their capital. The new loan rules were seen as a necessary step to end the credit squeeze that has hammered home values across the nation and caused billions in losses and writedowns on Wall Street, raising the risk of a recession.
"It is time to act," OFHEO Director James Lockhart said Wednesday. The new rules would allow Fannie and Freddie to play a larger role in subprime refinancing and loan modifications, as well as in the larger home loans, he added. See Also
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