A US regulator on Wednesday said it would lift mortgage portfolio limits on two government-backed companies, raising the prospects of increased capital for the distressed housing market.
The Office of Federal Housing Enterprise Oversight (OFHEO) said it plans to remove the portfolio growth caps for Fannie Mae and Freddie Mac on Saturday, following the firms' cleanup of sloppy financial accounting.
The caps were imposed in 2006 after the two housing government-sponsored enterprises (GSEs), which provide liquidity to the mortgage market that benefits millions of homeowners, failed to provide timely, audited financial statements.
OFHEO, the Department of Housing and Urban Development's independent financial watchdog, noted that Fannie Mae had published its audited financial statement for 2007 Wednesday and Freddie Mac's statement was due Thursday.
"These steps constitute an important milestone in remediation of their respective operational and control weaknesses that led to multi-year periods when neither company released timely, audited financial statements," said OFHEO director James Lockhart.
The government did not lift a requirement that the two firms maintain 30 percent capital cushions above the statutory minimum capital requirements.
Fannie Mae and Freddie Mac are authorized to back loans that meet their standards, up to 417,000 dollars, the threshold for the so-called jumbo loans.
"With the increase in portfolio limits, the GSEs will be enabled to continue to offer liquidity to the secondary mortgage market and hopefully reduce mortgage rates for primary mortgage loan borrowers," said Stephen Gallagher, an analyst at Societe Generale.
However, Gallagher highlighted that the government's move was risky, particularly for taxpayers.
"These are short-term measures that will increase the balance sheets of the GSEs. Lower mortgage rates will be based on perceptions that the government offers an implicit gaurantee on the debt issued," he said.
"The portfolio increase could significantly increase risks for the taxpayers."
Fannie Mae reported it swung into a loss of 2.1 billion dollars in 2007 amid the worst downturn in the US housing sector in decades and a related credit squeeze.
The firm lost a massive 3.55 billion dollars in the fourth quarter and forecast further turbulence this year.
"We expect housing market weakness to continue in 2008, leading to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in US residential mortgage debt outstanding," Fannie Mae said.
Shares in Fannie Mae and Freddie Mac rallied after the government removed the size restrictions on their portfolios, but subsequently lost steam. Fannie Mae closed 1.11 percent higher at 27.27 dollars and Freddie Mac lost 0.48 percent at 25.09.
