Freddie, Fannie caps lifted

By Al Yoon

NEW YORK (Reuters) - The government on Wednesday lifted limits on the amount the two largest mortgage finance companies can invest in home loans, a move that could unleash billions more dollars to stabilize the housing market and fend off a possible recession.

Restrictions were removed despite Fannie Mae's (FNM.N) announcement, also on Wednesday, that it suffered a staggering quarterly loss of $3.6 billion as defaults and foreclosures surged. The Office of Federal Housing Enterprise Oversight took the action in light of the signs the companies have recovered from accounting scandals, such as the resumption of "timely" financial reports.

Lifting the caps on Fannie Mae's and smaller rival Freddie Mac's (FRE.N) combined portfolios of $1.4 trillion will give them more ability to support the slumping housing market by increasing mortgage investments and bond programs.

Mortgage lenders see the two companies as the last bastions of funding since investors, who consider them as having implied government backing, are still buying their debt amid a widespread credit crisis.

Investors welcomed the action with some skepticism.

It may be the first step in easing tight credit markets but Fannie Mae's Chief Executive Officer Daniel Mudd, speaking on a conference call, underscored that the company's first priority is to preserve capital, not to grow.

"The GSEs are really looked to as the last great hope for the housing market," said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania. "To the extent that they will be able to grow their portfolio, their earnings will grow."

On March 1, OFHEO will remove the caps on the companies, known as government-sponsored enterprises, that have restricted their growth since they committed more than $11 billion in accounting errors earlier this decade.

Washington-based Fannie Mae posted a $3.80 per share net loss for the fourth quarter -- much worse than analysts' expectations, according to Reuters Estimates, of a loss of $1.39 per share.

The company had a profit of $604 million in the year-earlier period while in November it reported a $1.52 billion third-quarter loss.

Losses at Fannie Mae have constrained its ability to support housing in what CEO Mudd said was the "most challenging" market since the "dislocation" after World War II. At the same time, the company is under increased pressure from lawmakers to provide greater support to the housing market.

Key to Fannie Mae's ability to sustain losses in 2008 and perhaps 2009 is the company's capital, which rose last quarter to $3.9 billion above its regulatory minimum, analysts said. The increase resulted from $7.8 billion in sales of preferred stock, minus the quarterly loss, dividends and investments.

"Our strategy for moving through another tough year is to protect and conserve our capital base, and control credit losses," Mudd said in a statement.

Analysts said lifting investment limits is not a panacea. RBS Greenwich Capital, which underwrites GSE debt, said the current housing situation "does not sound like an environment that facilitates portfolio growth."

Fannie Mae said it will suffer bigger losses on home loans than it forecast just three months ago as declines in house prices accelerate and foreclosures rise. It increased its credit loss ratio forecast to a range of 11 basis points to 15 basis points in 2008 from the 8 to 10 basis points it forecast just three months ago.