March 19, 2008

JQ: Capital Requirements Follow The Asset Caps For Fannie/Freddie

"Regulators for Fannie Mae and Freddie Mac cut the companies' surplus capital requirement in an effort to expand their combined $1.5 trillion in mortgage investments and revive the U.S. home-loan market.

The requirement was lowered to 20 percent from 30 percent, the Office of Federal Housing Enterprise Oversight said in a news release today. The government-chartered companies, the largest sources of money for home loans, also agreed to raise a 'significant' amount of new capital, Ofheo said."

Fannie, Freddie Surplus Capital Requirement Is Eased [Bloomberg]
JustQuotes: What The OFHEO Are They Thinking? (Asset Caps) [SocketSite]

First Published: March 19, 2008 7:35 AM

Comments from "Plugged In" Readers

Doesn't this just leverage Fannie and Freddie more, thus exposing them to even more risk? No additional regulation was included with this move (which I believe was part of the original recommendation) to protect Fannie and Freddie from it's own greed.

These guys were having problems as it was without throwing fuel on the fire.

This ultimately just seems like a move to get some of the bad debt off private institutions books, that the federal government has said it will NOT bailout and put more of it on Fannie and Freddie's books which the federal government (meaning you and me taxpayer) will most certainly bailout.

I am all for getting the markets moving but I don't feel like bailing out all these anti-regulation/free market people who have spent the past 20 years touting the positives of deregulation but the minute the market turns and they experience the downside of deregulated/free markets they go whining to the federal government to do something and save their asses which results in exposing tax payers to more and more risk.

Look at the CME CSI Futures Contracts. They are predicting bay area home prices to be at 2003 levels by the end of 2008. So we are going to let Fannie and Freddie buy more of this deflating asset using LESS capitol?!?!?!

Posted by: Badlydrawnbear at March 19, 2008 8:47 AM

sorry capital not capitol

Posted by: badlydrawnbear at March 19, 2008 8:51 AM

Bush knows he has to pop the bubble before he leaves office. Otherwise, the dems will raise taxes to keep the bubble going, thererby making American business less competitive as it has to pay higher wages to allow people to buy overinflated houses.

When he pops it, the supply of mortgage money will dry up as people walk.

This move will allow FM/FM to step in and allow new buyers to buy the much less expensive houses when the (mostly foreign) mortgage investors realize they've been totally hung out to dry.

Sit back and enjoy the ride!

Posted by: tipster at March 19, 2008 9:03 AM

This will also generate a lot of refi activity under much stricter (i.e. normal) credit requirements, generating fees for banks and allowing better performing loans (or at least loans that can be sold) to replace riskier ones.

Fannie and Freddie shareholders seem like the biggest losers here, other than possibly the taxpayers.

Posted by: anono at March 19, 2008 9:17 AM

I don't know if it will actually generate a lot of refi's. I agree that a lot of people will apply but the problem with many of the loans is that the owner could not qualify under more traditional requirements in the first place and since the value of the property has declined in most cases they are likely in a worse position then before.

The problem people are experiencing now, at least those with a problem, is that they appear to have overpaid on the promise of appreciation and equity gains to get them out of the a bad loan and those gains have not occurred.

Obviously this isn't everyone out there but wouldn't most people who want/need to refi already done so a few years back when rates were lower( or at least as low as they are now)?

Posted by: badlydrawnbear at March 19, 2008 9:26 AM

I'm thinking of more recent buyers like myself, who would qualify but the rates simply aren't currently low enough to make it worth it. Actually, I'm starting to wonder if it makes sense to HELOC 100K since the rate is now well below my fixed rate mortgage and use the funds to turn my jumbo into a conforming and then refi the new lower mortgage. Traditional conforming mortgages can be had right now at 5.6-5.75%.

Posted by: anono at March 19, 2008 9:42 AM

anono, not a bad idea at all! And you're not the only person to think of that... http://exurbannation.blogspot.com/2008/03/zirp-burp.html

Posted by: sb at March 19, 2008 10:01 AM

Bush knows he has to pop the bubble before he leaves office. Otherwise, the dems will raise taxes to keep the bubble going, thererby making American business less competitive as it has to pay higher wages to allow people to buy overinflated houses.

You're kidding, right? 1) Bush is not going to pop any bubble, he wants to keep the party going so John McCain has a chance of getting elected. 2) Taxes are going to have to be raised one way or the other, the Dems are just the only ones talking about it. What's the alternative?

Posted by: anon at March 19, 2008 10:14 AM

Here's my take on it - anyone more involved with the capital/loan markets care to comment additionally, I'd love to hear it....The reason they have done this is the capital markets are pretty frozen, so even normal loan activity is being hampered. Banks cannot sell any types of real estate loans (houses, apartments, or commercial loans) down stream to institutional investors/Wall Street. This was the dominant financing method of the past couple of years and now banks don't have the capital reserves to hold the loans themselves (aka portfolio lending) as they already have too many on the books from late 2007. So now banks can't lend anywhere near their normal volume on a portfolio basis and Wall Street investors won't touch any real estate loan instrument as many of those buyers have their own liquidity issues as well or just want to stay away from the real estate sector. So I've heard a lot of standard apartment loans now are being geared toward FNMA approval when 6 months ago that was unheard of. The structure of the entire lending environment has changed dramatically in the past couple of years and no one was paying attention as long as the money was flowing. Well now it's not flowing nearly as much and more than one person thinks it's kind of important to keep the economy going. The Fed can't seem to make banks lend money (unless they want to ease their capital/reserve requirements for lending - THAT will be interesting if it happens), so that's why they have this additional leverage going on at Fannie and Freddie to get money out as kind of a last resort while everyone else figures out the mess. The real question is whether banks are going to go back to portfolio lending or the package and sell paradigm is going to continue (probably with additional regulation if it does). Stay tuned.

Posted by: Miles at March 19, 2008 10:38 AM

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