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Reins are eased on loan buyers

Times Staff Writer

Federal regulators said Wednesday they had begun loosening restrictions on the giant mortgage buyers Fannie Mae and Freddie Mac, a move that could bolster the ailing housing market.

Despite huge losses at the government-sponsored companies, regulators lifted a $1.5-trillion limit on mortgages they hold on their books in total. The U.S. Office of Federal Housing Enterprise Oversight also said it would begin talks with Fannie Mae and Freddie Mac about phasing out a 4-year-old rule that requires them to maintain 30% more capital in reserve than is legally required under their charters.

The 30% rule was imposed because the pair committed $11 billion in accounting errors earlier this decade.

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The announcement came on the same day that Fannie Mae, the largest buyer of mortgages, reported a fourth-quarter loss of $3.6 billion, or $3.80 a share, because of rising loan defaults.

That was a far bigger loss than the $1.24 a share analysts had expected, but its stock rose 30 cents to $27.27. Washington-based Fannie Mae had earned $604 million, or 49 cents a share, a year earlier.

For the year Fannie reported a net loss of $2.1 billion, or $2.63 a share, compared with a net income of $4.1 billion, or $3.65, in 2006.

Freddie Mac, Fannie Mae’s smaller cousin, reports its fourth-quarter financial results today. Its shares fell 12 cents Wednesday to $25.09.

In congressional testimony Wednesday, Federal Reserve Chairman Ben Bernanke said the government-sponsored mortgage firms should concentrate on raising capital and increasing reserves. And analysts predicted that despite the easing of constraints, Freddie and Fannie would spend more time digesting their existing loan problems than going on a mortgage-buying spree.

“The losses seem to be going to levels never seen before,” said analyst Frederick Cannon of Keefe, Bruyette & Woods. The two companies hold mortgages as investments, and pool loans to back bonds that they guarantee. As more homeowners default on loans -- not only in the sub-prime market for high-risk borrowers but also among credit-worthy “prime” borrowers -- investors have been demanding far higher returns from any mortgage bonds other than those produced by Freddie Mac and Fannie Mae. That has forced interest rates up on a variety of loans, including so-called jumbo mortgages -- those over $417,000, which are often needed by California borrowers.

Mortgage industry leaders applauded the relaxation of the regulatory reins. That easing, coupled with a recent raising of a $417,000-cap on mortgages Fannie and Freddie can purchase, is “terrific news” for borrowers, said Fred Arnold, president-elect of the California Assn. of Mortgage Brokers.

Arnold, president of American Family Funding in Santa Clarita, noted that Los Angeles County retained its status as the nation’s least-affordable housing market in a survey last week by the National Assn. of Home Builders and Wells Fargo.

Other metro regions near the bottom of the affordability chart included Orange and Ventura counties and the San Francisco Bay Area.

Until now, borrowers requiring jumbo loans have been paying an extra percentage point or more in interest to obtain loans, Arnold said.

That “spread” should shrink now that Fannie and Freddie can buy bigger loans, he added.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, noted that Wednesday marked the first time in years that Fannie Mae had released audited financial statements on schedule.

Fannie Mae executives said in a conference call that their first priority was maintaining capital given the tide of defaults. Chief Executive Daniel Mudd said the losses reflected plummeting home prices in much of the country and millions of borrowers struggling with their mortgages. In the L.A.-Orange County area, fourth-quarter home prices were down 13.7% from a year earlier, a well-regarded survey reported this week.

“We are working through the toughest housing and mortgage markets in a generation,” Mudd said.

Fannie Mae also said that to ensure more accurate appraisals and reduce the chance of fraud it likely would ban appraisals performed by employees of lenders or arranged by brokers. That proposal, a response to yearlong New York state probe of the mortgage industry, was contained in a “talking points” memo to lenders this week that was first reported by American Banker.

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scott.reckard@latimes.com

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Times wire services were used in compiling this report.


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