Feds remove cap on Fannie, Freddie

WASHINGTON — Fannie Mae and Freddie Mac will be allowed to expand their roles in the turbulent mortgage market even as worsening conditions in the housing sector punish the two companies.

Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected today to report a $1.5 billion fourth-quarter loss, according to Wall Street estimates.

Under a previous agreement with federal regulators, the timely filing of Fannie's and Freddie's financial results triggers the removal of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the government-sponsored companies.

Analysts said the impact will be limited, however, because of the large cash cushion Fannie and No. 2 mortgage financer Freddie must maintain as a reserve against risk. Tightness in credit markets makes it expensive for Fannie and Freddie to marshal additional funds.

The Office of Federal Housing Enterprise Oversight on Wednesday said that on Saturday it will remove the combined $1.5 trillion cap on Fannie's and Freddie's mortgage holdings.

However, a bigger constraint on the companies' ability to buy mortgages has been a government mandate that requires Fannie and Freddie to keep 30 percent more capital in reserve than the minimum legal requirement, analysts said. That restriction, which the government is considering decreasing gradually, means Fannie and Freddie would have to boost their reserves by billions more to be able to make more loan purchases.