Freddie Mac and Fannie Mae were given the go ahead to trim their capital reserves to increase liquidity in the mortgage markets. The move will allow the two to add up to 200 billion in new mortgages for the United States housing market.
Of course there is a down side. By reducing the capital of the two quasi governmental mortgage resellers they expose them to more risk if the markets deteriorate. This could create a death spiral for the companies if things go bad.
The impact of a meltdown in the housing and capital markets would be magnified if either of these companies collapsed.
The point, however, is not to save Fannie and Freddie themselves but to use the two firms, which buy mortgages and resell bunches of them to investors in the form of bonds, to ease the difficulties of borrowers more generally. It’s as if our hypothetical family pawned its silver to help the neighbors out of a financial jam. Scouring the federal government’s sphere of influence for every drop of cash that could improve liquidity for securities markets, the Federal Reserve Board and the Treasury Department have prevailed upon OFHEO to release some of Fannie and Freddie’s pent-up capacity. The move is of a piece with other recent Fed actions, including its offer to accept Fannie and Freddie’s mortgage-backed securities and other bonds as collateral for up to $200 billion in new loans to banks, and its decision to lend to investment banks. via the washingtonpost.com.
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