GSEs plan $2 trillion in US mortgage purchases

Fannie Mae, Freddie Mac and their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), have announced an initiative potentially worth $2 trillion to increase liquidity in the troubled US mortgage market.

The two government-sponsored enterprises (GSEs) and OFHEO expect to provide up to $200 billion in immediate liquidity to the mortgage-backed securities (MBS) market, which has frozen up in recent months as dealers steer clear of the sector, fearing exposure to depreciating subprime mortgage pools.

Under the terms of the plan, OFHEO will permit a large portion of the GSEs’ 30% capital requirement surplus to be invested in mortgages and MBS, although both Fannie and Freddie insist that such funding will be provided by raising additional capital and that both companies will maintain overall capital levels greater than OFHEO-mandated requirements.

OFHEO estimates that Fannie Mae’s and Freddie Mac’s existing capabilities, combined with the new initiative and the relaxation of the GSEs' portfolio caps announced in February, should allow the firms to purchase or guarantee about $2 trillion of mortgages this year.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year, but let me be clear, both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves,” said OFHEO director James Lockhart.

"We believe they can play an even more positive role in providing the stability and liquidity the markets need right now. OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise,” he added.

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