The federal regulator who oversees Fannie Mae and Freddie Mac said Friday they likely will have to raise between $10 billion and $20 billion in new capital to offset the impact of loosened regulatory restraints.
James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, spoke a little over a week after his agency announced an agreement with the two mortgage finance companies. The deal reduced the cash cushion they are required to maintain so they could expand their roles in the stricken housing market.
In an on-air interview Friday on financial news network CNBC, Lockhart said that in exchange for the lowered capital requirements, Fannie and Freddie would have to raise equity “probably in the range of $5 billion to $10 billion each” this year.
Amid financial market turmoil sparked by the housing downturn, Lockhart’s agency has been negotiating with Fannie and Freddie on how best to restore stability to the market for mortgage-backed securities, three-quarters of which are issued by the government-sponsored enterprises.
That market has suffered a severe liquidity shortage in recent months, a huge obstacle to a recovery in credit markets and mortgage lending.
OFHEO said Fannie and Freddie could lower their mandated capital reserves by one third, allowing the companies to provide up to $200 billion in new funding for home loans.
Plans to raise new capital, part of which may come from stock sales to the public or cuts in Fannie and Freddie dividends, are aimed at replenishing the lowered reserves.
Lockhart has said OFHEO was willing to take these steps because the companies recently brought their financial reporting up-to-date. Both companies had delays in filing financial results after multibillion-dollar accounting scandals in recent year that required them to restate earnings.
After Lockhart’s interview Friday, he issued a statement in which he said: “I expect the companies to determine the amount (of capital to be raised) within a broad range based upon mortgage market needs, the expected return to their shareholders and the advice they receive from investment bankers.”
To date, both companies have declined to specify how much capital they plan to raise in the near term.
Two other steps that affect Fannie and Freddie aimed at combating the housing and credit crisis include:
- Congress gave Fannie and Freddie an increase until year-end in the ceiling on mortgages that they can buy or guarantee — from $417,000 to $729,750 in high-cost housing markets.
- On March 1, OFHEO lifted a combined $1.5 trillion cap on their mortgage portfolios.
