To support growth and further restore market liquidity, OFHEO announced that it would begin to permit a significant portion of the GSEs' 30 percent OFHEO-directed capital surplus to be invested in mortgages and MBS.
This move is long overdue. I was calling for it back in November, when OFHEO was on a very different page:
The reason why capital-adequacy rules exist is to make sure that there's a cushion in times of crisis. Well, guess what - this is a time of crisis. The capital-adequacy rules should be loosened, but instead OFHEO is sticking to its decision to impose significantly tighter requirements on Freddie.
So OFHEO has come full circle since then; I'm glad. Is this enabling, I'm asked, or is it some kind of true solution? The answer is in between. It's not really enabling, since Fannie and Freddie are about as blameless as mortgage professionals come in this present fiasco. Yes, their internal accounting was atrocious. And yes, their decision to spend billions of dollars buying back their own stock was idiotic. But they were reasonably good at maintaining some kind of handle on underwriting standards, which means that their effect on the housing market generally was to act, at the margin, as a brake on soaring house prices rather than as an accelerator.
What's more, the loosened capital requirements come with a catch: Fannie and Freddie have to go out and raise new capital. So this shouldn't weaken their balance sheets overmuch.
On the other hand, this is certainly not a true solution. The sum total of capital freed up to buy mortgages is about $5.8 billion, which is peanuts, really, and not remotely enough to have a noticeable effect on the nation's housing markets. (Update: To clarify, thanks to the power of leverage, the $5.8 billion in extra capital will allow Fannie and Freddie to buy $200 billion in mortgages. Which is tiny in relation to the size of the US housing market.)
So chalk this up to "step in the right direction". And if Fannie and Freddie show that they're using their extra capital responsibly, maybe OFHEO will let them have even more leeway in future.
1. It's solvency and leverage -- not liquidity -- that's the real issue.
2. I really don't see why more leverage on a small increase in equity is a good thing given the above.
3. They both wrote off billions and admit they have billions more to write off.
What am I missing that would suggest that that they are soundly managed and should be entrusted with more funds to manage makes the slightest sense? This is just more money for a bailout of lenders as far as I can tell.
Do you know than FNM instead of foreclosing move past due to a 2nd mortgage. Everyone is buying time and hope things are better in a few more months. Bear Stearns ran out of time. Who is next?
It's ``perverse'' that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged ``to put people into homes that they end up losing,'' Syron said at a meeting with analysts and investors in New York.
Both he and Daniel Mudd (CEO Fannie Mae) have predicted a bleaker 2008 than 2007.
So the solution is, throw more money at them, loosen their requirements even more so they can use even more leverage to keep it all pumping. Good luck with that..pffft.