Doing deals
We wrote about the problems of undercapitalization of Fannie Mae and Freddie Mac the other day. Now some steps have been taken that add $200 billion of mortgage buying or holding capacity, as well as underscore the existence of the so-called “implicit” guarantee that these hybrid companies have from the US government. WSJ:
The regulator for mortgage-finance giants Fannie Mae and Freddie Mac Wednesday reduced the capital the firms must hold in an effort to help boost the ailing housing market. The Office of Federal Housing Enterprise Oversight, or Ofheo, said it was initially reducing the 30% capital surplus it requires of the firms to 20%. The regulator said the move could provide up to $200 billion in immediate liquidity to the troubled mortgage-backed securities market…
In return for the reduction, the two firms have committed to raising capital so that they will be able to provide more funding for the home mortgage market. The move should reduce Freddie’s capital requirement by about $2.6 billion and Fannie’s by $3.2 billion. The two companies, chartered by Congress, acquire home loans from lenders. They hold some as long-term investments and sell others in the form of securities to other investors world-wide. They are the dominant providers of funding for home loans.
The ailing U.S. mortgage market should get a boost from the decision, U.S. Treasury Secretary Henry Paulson said. “Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market,” Mr. Paulson said in a statement.
We couldn’t help noticing that, in the White House economics meeting the other day, Fed Chairman Ben Bernanke looked pretty spent while Henry Paulson looked animated, pumped up. The speed with which the rescue deals have been getting done over the last couple of weeks (as well as a little bit of market awareness) suggests some additional, not so academic, resources are at work these days, including perhaps New York Fed President Timothy Geithner, Treasury Secretary Henry Paulson and former Goldman Sachs vice chairman Robert Steel, the Treasury’s undersecretary for domestic finance.