Politics & Government

Feds take new steps to ease home-loan crisis

WASHINGTON — A federal housing regulator on Wednesday made it easier for mortgage giants Fannie Mae and Freddie Mac to absorb problem loans that are dragging down many U.S. homeowners, 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 extra capital that Fannie and Freddie must keep in reserve from 30 to 20 percent. With less in reserve, these two government-sponsored enterprises will have an estimated $200 billion more available immediately to purchase troubled home loans.

"This should help keep some at-risk borrowers in their homes, which will help stabilize the real estate market," Kieran Quinn, the 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 to homeowners who are behind on their payments. One in 20 home loans nationwide is past due, according to the Mortgage Bankers Association.

Wednesday's move by regulators seeks to provide a backstop to lenders. If the stressed 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 so-called 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.

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

Dan Mudd, the chief executive officer of Fannie Mae, told CNBC television Wednesday that he'll strive to help homeowners with both sub-prime loans and jumbo loans. But he cautioned that he'd be conservative in his approach.

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

Sub-prime loans, given to the borrowers with the weakest credit histories, were the first spark that led to a nationwide housing crisis that's spread to Wall Street and threatens the broader U.S. economy. One in five sub-prime adjustable-rate loans are delinquent, according to the Mortgage Bankers Association, and foreclosure starts are especially rampant in California and Florida.

Many of these loans carried adjustable rates that this year could rise to much higher rates that borrowers can't afford. Treasury Secretary Paulson has pushed lenders to temporarily freeze these loans at their starter rates. Sheila Bair, the chairman of the Federal Deposit Insurance Corp., which regulates national banks, has called on lenders to refinance borrowers into fixed-rate loans with lower rates.

Federal Reserve Chairman Ben Bernanke has urged lenders to take losses and quickly place borrowers into lower-cost loans to halt foreclosures, which are at record levels and are helping to drag down the values of homes whose owners are making their payments.

The chairman of the Senate Banking Committee, Christopher Dodd, D-Conn., issued a statement Wednesday saying that he expects Fannie and Freddie "to use the capital not only to help the markets generally, but also to help sub-prime borrowers in a much more focused manner."

By taking on more troubled loans, Fannie and Freddie will assume greater risks, since 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're financing, the very situation that private-sector lenders have 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'd 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.

The benefits of Wednesday's action by regulators work like this: By having more cash available to buy mortgages, Fannie and Freddie provide an injection of money into the pipeline that sends mortgages into what's called the secondary mortgage market. That's where home loans are bundled together and sold to investors as mortgage bonds.

During the housing boom of 2001 to 2006, a lot of this bundling was done by the private sector, a process called securitization. Private-sector securitization has all but dried up now, and that's why Wednesday's action is like sending in an economic cavalry unit.

"In a panic, everyone wants a government guarantee," Pollock said.

With more money flowing, hopefully lenders will feel more able to offer borrowers a wide variety of financing, and they now know that Fannie and Freddie will absorb many of these loans.