Fannie, Freddie cleared to pump $200 billion into market

By Patrick Rucker

WASHINGTON (Reuters) - The regulator of Fannie Mae and Freddie Mac on Wednesday eased capital requirements for the two biggest housing finance agencies, allowing them to pump up to $200 billion into the distressed U.S. mortgage market.

The regulator, the Office of Federal Housing Enterprise Oversight, said it was lowering to 20 percent from 30 percent the amount of extra capital the companies are required to hold. It will also consider further reductions. The 30 percent requirement had been imposed after the discovery of lax accounting and risk controls earlier this decade.

In addition, the companies will begin to raise "significant capital," OFHEO said in a joint statement with Fannie Mae and Freddie Mac. Last year, the companies sold nearly $14 billion in preferred stock.

The extra $200 billion would allow Fannie Mae and Freddie Mac to purchase both existing mortgage-backed securities and new home loans originated by banks. It could also enable them to increase their business of guaranteeing mortgages, a key to helping pull the U.S. housing market out of its funk.

"It's good news," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi in New York. "A lot of mortgage originators have left the business, so it's a good thing that mortgage money will be made more available."

The move is a shift for the Bush administration, which has long argued the combined $1.4 trillion portfolio of the companies represents more of a risk to the U.S. financial system than a help to homeowners. The new policy comes as falling home prices and increasingly jittery financial markets have pushed the U.S. economy to the verge of recession.

After the announcement, shares of Fannie Mae and Freddie Mac rose sharply for a second day. Fannie Mae stock rose 10.5 percent to $31.17, a five-week high, while Freddie Mac jumped 8.3 percent to $28.18, the highest since February 20.

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