Lenders can rescue more mortgages

A policy change allows government-backed Fannie and Freddie Mae to absorb more troubled loans

WASHINGTON -- A federal housing regulator made it easier Wednesday for mortgage giants Fannie Mae and Freddie Mac to absorb loans that are dragging down many U.S. homeowners. It was the latest of several measures designed to stabilize falling home prices.

The Office of Federal Housing Enterprise Oversight announced that it would lower the amount of capital that Fannie and Freddie must keep in reserve from 30 percent to 20 percent. With less in reserve, these two government-sponsored enterprises would have an additional $200 billion available immediately to buy home loans at risk of default.

"This should help keep some at-risk borrowers in their homes, which will help stabilize the real estate market," Kieran Quinn, president of the Mortgage Bankers Association, said in a statement supporting the action.

Despite promises otherwise, mortgage lenders and loan servicers have moved slowly to modify or refinance loans for homeowners who are behind on their payments. One in 20 U.S. home loans is past due, the Mortgage Bankers Association said.

Wednesday's move by regulators seeks to provide a backstop to lenders. If the teetering loans are modified, Fannie and Freddie now are better able to purchase and bundle them with other home loans to offer to investors as mortgage bonds.

"Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," Treasury Secretary Henry Paulson said in a statement.

The news is particularly important to California and other states with high home prices. Fannie and Freddie will be freer to absorb many of the jumbo loans that until recently were too high-priced to be in their portfolios.

"This capacity will permit them to do more in the jumbo temporary conforming market, sub-prime refinancing and loan modifications areas," the Office of Federal Housing Enterprise Oversight said in a statement.

Raising the limits

Wednesday's action follows a move by Congress last month to raise the loan size that the Federal Housing Administration can underwrite. It also temporarily raised the cap on loan prices that Fannie and Freddie can absorb.

The maximum loan amount that can be underwritten by FHA and packaged by Fannie and Freddie into mortgage bonds is $729,750. That's up dramatically from the previous limit of $417,000.

Dan Mudd, the chief executive officer of Fannie Mae, told CNBC Wednesday that he will strive to help homeowners with both subprime loans and jumbo loans. But he cautioned that he would be conservative in his approach.

"I don't think this is a panacea for all of the problems," he said.

By taking on more troubled loans, Fannie and Freddie will assume greater risks, because home prices continue falling in many parts of the country after steep run-ups.

Their action could put a new floor under home prices, making them level off. But if prices continue dropping, Fannie and Freddie may be left holding loans that are worth less than the homes they are financing, the very situation that private-sector lenders found themselves in over the past year as prices skidded.

Although the Office of Federal Housing Enterprise Oversight lowered the capital requirements for Fannie and Freddie, the chairman of the oversight agency said there would be an adequate cushion of money in the bank for both enterprises, which are congressionally chartered but operate in the private sector.

The oversight agency cracked down hard on Fannie and Freddie in 2005 and 2006 amid accounting scandals. That regulators are willing to lower reserve requirements suggests that they think Fannie and Freddie are prepared to take on more risk.

"Fannie and Freddie have spent literally billions of dollars revamping their accounting and control systems," said Alex J. Pollock, a fellow at the American Enterprise Institute, a conservative policy-research group.