Questions Surround Fannie, Freddie

By Nick Timiraos 

The government’s move to ease the limits on the securities holdings of Fannie Mae and Freddie Mac has ignited a debate among analysts about what the companies will do with their longer leash. When the Treasury Department took over Fannie and Freddie last year, one of the requirements they set for the companies required them to begin shrinking their portfolios of mortgages and related investments, which total a combined $1.5 trillion. The idea was to rein in the companies’ size and growth. But last Thursday, the Treasury eased that requirement, meaning the companies won’t be forced to sell mortgages next year into an already weak market and could even buy mortgages on the market, which could help hold down interest rates. The Treasury also suspended for the next three years the $400 billion cap on the bailout subsidy that the government will offer. That could give them more flexibility to modify mortgages without worrying about taking losses.  The relaxed portfolio limits calmed investor worries that Fannie and Freddie would be forced to sell some of their mortgage holdings just as the Federal Reserve was preparing to wind down its purchases of mortgage-backed securities next spring. The Fed’s commitment to buy up to $1.25 trillion has helped to keep mortgage rates near record lows; without that support some economists have said that could rise to 6% by the end of 2010.  “It’s created a government-purchasing facility other than the Fed,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington.

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