America's Two Largest Mortgage Finance Companies Get A Break

The New York Times reports on something that will mean easier and cheaper mortgages for many:

WASHINGTON — With the blessing of the Bush administration, the regulator of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies, eased a major restriction on the companies on Wednesday in an effort to unfreeze credit markets and stabilize housing prices.

By reducing the extra cushion of capital the two companies have been required to hold since 2004, the regulator, the Office of Federal Housing Enterprise Oversight, is enabling the companies to invest $200 billion more in home loans. In essence, the companies are being allowed to take billions of dollars that had been used as a reserve against possible further losses and invest that money now in the housing market.

“Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market,” said Treasury Secretary Henry M. Paulson Jr.

Officials hope that by unshackling Fannie and Freddie they can begin to reduce the cost of borrowing for prospective home buyers or refinancing for people who already own homes, help unlock the credit markets and possibly reduce some of the downward pressure on home prices.

But critics said that if the housing market continued to decline, the move could put the two companies on a less sure footing and ultimately require a huge taxpayer bailout.

At the end of 2007, Fannie Mae had $45 billion in capital and Freddie Mac had $37 billion, for a total of $82 billion between them. But that cushion supports more than $1.4 trillion of combined debt and debt guarantees.

“I think it’s very dangerous and it’s a sign that people are very frightened,” said Thomas H. Stanton, an expert on the two companies who teaches a course on credit risk at Johns Hopkins University. “At a time in which finance companies are holding questionable assets and facing losses, regulators typically require more capital, not less.”