I am posting this article in its entirety because I have been thinking about the Subprime Mess we are facing and was shocked to read this article. The government is creating a gigantic mess that will eventually end up in the hands of the tax payer. When the government reduces the cash requirement that Fannie and Freddie is required to hold as a cushion it is very similar to a subprime borrower putting 0% down on a home loan. You lower the safety cushion for a situation that is risky and you end up exactly where we are at now.
The increased higher loan amounts that Fannie and Freddie have been given by Congress will have little impact in the near future. The guidelines that are implemented with the new higher loan amounts are too difficult to qualify for.
I think this will also create another opportunity to short stock on bank and on Fannie and Freddie. I am currently short on Bank of America and made some money on shorting Countrywide.
Wednesday March 19, 12:10 pm ET
By Marcy Gordon, AP Business Writer
WASHINGTON (AP) — The government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to quickly inject an additional $200 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 for the two — will be reduced by a third under the new plan. The goal is to free-up money to help new home buyers take out loans and to help existing home owners refinance into more affordable mortgages.
The capital requirement for each company will be reduced from the current 30 percent to 20 percent, and further reductions will be considered by the regulator in the future. Fannie and Freddie will likely raise billions of dollars through special sales of stock.
"Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year," OFHEO Director James B. Lockhart said at a news conference. "We believe they can play an even more positive role in providing the stability and liquidity the markets need right now."
The companies’ shares were buoyed by news of the agreement. Fannie stock jumped $2.64, or 9.4 percent, to $30.86 in late morning trading, while Freddie shares advanced $2.98, or 11.4 percent, to $29. The companies’ shares have plummeted to fresh 52-week lows in recent weeks amid concern over their ability to find buyers for their mortgage-linked securities amid plunging home prices and rising foreclosures.
The new agreement was the third step the government has taken in recent weeks to allow Washington-based Fannie and McLean, Va.-based 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 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 to $729,750 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 cap on their mortgage-investment holdings.
OFHEO estimated that the combination of these efforts should allow Fannie and Freddie to purchase or guarantee roughly $2 trillion in mortgages this year.
The two companies together hold or guarantee around $4.9 trillion in home-loan debt. As the mortgage crisis and ensuing credit crunch have worsened in recent months, policy makers have increasingly looked to them to step up their participation in the hobbled market for securities backed by mortgages.
"This is what (Fannie and Freddie) were put in place for. … And we will deliver," Freddie Mac Chairman and CEO Richard Syron said.
Influential Democratic lawmakers have been pushing for a reduction in the companies’ capital-holding requirements. Bush administration officials and numerous Republican lawmakers, on the other hand, have long opposed allowing Fannie and Freddie to take on more debt, contending that doing so could threaten the global financial system.
