Plan Could Help Spur Home Refinancings
The government’s action last week to reduce the level of capital that Fannie Mae and Freddie Mac must hold could help boost home buying later this year by freeing about $200 billion in additional financing for loans.
The move is part of a broader federal effort that’s aimed, in part, at helping some people with shaky credit. Another goal is to let struggling homeowners refinance into lower-cost loans.
But experts say high hurdles to easing the mortgage crisis persist. People with scant equity in their homes will still face challenges. So will borrowers who can’t obtain financing because of stricter credit standards.
More Stability
Still, “the additional money can be used to buy mortgages,” says Steve O’Connor, a senior vice president with the Mortgage Bankers Association. “All of this will make money more available, (and) more market activity will provide more stability.”
The plan will:
• Reduce required capital. The action—the latest in a series of steps to let Freddie and Fannie shoulder bigger mortgage burdens—was announced by the Office of Federal Housing Enterprise Oversight, which oversees the two government-sponsored companies. It will reduce the cushion of capital the companies must carry by one-third.
• Help homeowners. The money that will no longer be needed for capital will instead go toward buying more homeowners’ mortgages so they can refinance. Freddie and Fannie will also look to other sources to generate money for additional capital.
• “All of this will make more money available,” says Joel Naroff, chief economist of Naroff Economic Advisors. “Some buyers who may have been considered risky may now be able to get” mortgages.
• Add to other housing stimulus initiatives. The latest move follows other government steps to aid homeowners. A federal stimulus package will let Freddie and Fannie temporarily take on bigger “jumbo” mortgages in high-price markets—by raising the limit on mortgages they can buy or guarantee, from $417,000 to up to $729,750 in some markets.
The two firms were also relieved of a combined $1.5 trillion cap on mortgage investment holdings.
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