Set the way back machine for 1995

Much has been written about how a lot the international investment capital that's been sloshing around the planet (thanks in part because of the U.S.'s voracious appetite for imports) in search of nice, safe returns ended up in securities backed by mortgage loans, helping fuel the housing boom.

But it's not just international banks and investors in places like China and France who were attracted to these investments. Insurance companies and pension funds manage vast sums that their managers try to invest prudently so they aren't eaten away by inflation.

Ohio's five public employee pension funds have more than $500 million invested in securities backed by subprime mortgages, the Associated Press reports. That's less than 1 percent of the $184 billion entrusted to the funds, which also have a 10 percent stake in more traditional mortgages. But Ohio's attorney general is looking into the role ratings agencies allegedly played in marketing the securities to the funds.

Why do we care? Because the managers of Ohio's pension funds, like many other conservative investors who (perhaps unwittingly) fueled the mortgage lending boom, aren't going to be bankrolling any more risky loans. There's been a flight of capital to prime, conventional, conforming loans that's pushed interest rates down for some borrowers. But for others -- first-time homebuyers with little or no money for a down payment, or even prime borrowers who need jumbo loans -- the cost of borrowing is going up. That means many buyers will have to settle for less home, or may be priced out of higher cost markets altogether.

Last week major lenders like Countrywide and Washington Mutual warned that they were having trouble selling their loans to investors in the secondary market -- particularly non-conforming loans. 

In the mean time, federal regulators say they're not going to relax the reins on government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac, which had their wings clipped in the wake of management and accounting scandals at both companies. Fannie and Freddie are operating under caps that limit their loan portfolios to about $1.4 trillion.

Some lawmakers want to raise the caps -- Fannie has asked for a 10 percent raise -- but the Office of Federal Housing Enterprise Oversight has said no, for now. In a letter to Sen. Charles Schumer, OFHEO Director James Lockhart (the guy Jim Cramer loves to hate) said Fannie and Freddie are supposed to provide liquidity for prime, conventional, conforming loans. So raising caps wouldn't do much for the markets that are having liquidity problems -- subprime, Alt-A and jumbo -- Lockhart said.

President Bush said last week he won't even think about giving Fannie and Freddie more leash until Congress passes long-awaited legislation that would overhaul oversight of the GSEs (the issue of portfolio caps could stall the bill again this year).

Fannie and Freddie are free to continue guaranteeing and securitizing loans to their hearts content, Lockhart says. Which probably doesn't do much for Cramer -- or many of the people who got easy loans a year or two ago and are now looking to refinance.

As Inman News columnist Lou Barnes said Friday, "In three weeks' time the clock has turned back to 1995."

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