Fannie, Freddie to Use Billions More for Lending

March 19, 2008— -- WASHINGTON (AP) -- The U.S. government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion (euro127.4 billion) of financing for home loans.

The initiative, which will require Fannie and Freddie to raise substantial funds, is part of a broader government strategy to ease a credit crisis that has made it difficult for consumers and businesses to borrow, and spread fear throughout global financial markets.

The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, said the mandatory cash cushion for Fannie and Freddie -- now nearly $20 billion (euro12.7 billion) for the two -- will be reduced by a third under the new plan. The freed-up money will go toward buying mortgages of struggling homeowners, enabling them to refinance into more affordable loans.

The capital requirement for each company will be reduced from the current 30 percent to 20 percent, and further reductions will be considered in the future. Fannie and Freddie will raise additional capital through special sales of stock or cuts in dividends.

It was the third step the government has taken in recent weeks to allow Fannie and Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.

The $168 billion (euro107 billion) economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 (euro265,740) to $729,750 (euro465,050) in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion (euro960 billion) cap on their mortgage-investment holdings.

The oversight agency estimated that the combination of these efforts should allow Fannie and Freddie to purchase or guarantee roughly $2 trillion (euro1.2 trillion) in mortgages this year.