Feds take steps to ease loan crisis

WASHINGTON -- A federal housing regulator Wednesday made it easier for mortgage giants Fannie Mae and Freddie Mac to absorb problem loans that are dragging down many U.S. homeowners, the latest of several measures designed to stabilize falling home prices.

The Office of Federal Housing Enterprise Oversight announced that it would lower the amount of extra capital that Fannie and Freddie must keep in reserve from 30 to 20 percent. With less in reserve, these two government-sponsored enterprises will have an estimated $200 billion more available immediately to purchase troubled home loans.

"This should help keep some at-risk borrowers in their homes, which will help stabilize the real estate market," Kieran Quinn, the president of the Mortgage Bankers Association, said in a statement supporting the action.

Despite promises otherwise, mortgage lenders and loan servicers have moved slowly to modify or refinance loans to homeowners who are behind on their payments. One in 20 home loans nationwide is past due, according to the Mortgage Bankers Association.

Wednesday's move by regulators seeks to provide a backstop to lenders. If the stressed loans are modified, Fannie and Freddie now are better able to purchase and bundle them with other home loans to offer to investors as mortgage bonds.

"Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," Treasury Secretary Henry Paulson said in a statement.

The news is particularly important to California and other states with high home prices. Fannie and Freddie will be freer to absorb many of the so-called jumbo loans that until recently were too high-priced to be in their portfolios.

"This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas," the Office of Federal Housing Enterprise Oversight said in a statement.

Wednesday's action follows a move by Congress last month to raise the loan size that the Federal Housing Administration can underwrite.

It also temporarily raised the cap on loan prices that Fannie and Freddie can absorb. In both cases, the maximum loan amount that can be underwritten by FHA and packaged by Fannie and Freddie into mortgage bonds is now $729,750. That's up dramatically from the previous limit of $417,000.

Dan Mudd, the chief executive officer of Fannie Mae, told CNBC television Wednesday that he'll strive to help homeowners with both subprime loans and jumbo loans. But he cautioned that he'd be conservative in his approach.

"I don't think this is a panacea for all of the problems," he said.

Subprime loans, given to the borrowers with the weakest credit histories, were the first spark that led to a nationwide housing crisis that's spread to Wall Street and threatens the broader U.S. economy. By taking on more troubled loans, Fannie and Freddie will assume greater risks, since home prices continue falling in many parts of the country after steep run-ups.

Their action could put a new floor under home prices, making them level off. But if prices continue dropping, Fannie and Freddie may be left holding loans that are worth less than the homes they're financing, the very situation that private-sector lenders have found themselves in over the past year as prices skidded.

Although the Office of Federal Housing Enterprise Oversight lowered the capital requirements for Fannie and Freddie, the chairman of the oversight agency said there'd be an adequate cushion of money in the bank for both enterprises, which are congressionally chartered but operate in the private sector.

The oversight agency cracked down hard on Fannie and Freddie in 2005 and 2006 amid accounting scandals. That regulators are willing to lower reserve requirements suggests that they think Fannie and Freddie are prepared to take on more risk.

"Fannie and Freddie have spent literally billions of dollars revamping their accounting and control systems," said Alex J. Pollock, a fellow at the American Enterprise Institute, a conservative policy-research group.