Baby we were born to run

(within the constraints of our OFHEO-directed 30 percent additional capital requirements)

So the big news in mortgage lending today was that federal regulators are lifting the growth caps on Fannie Mae and Freddie Mac's loan portfolios, which had limited the government-sponsored enterprises (GSEs) from holding more than about $1.5 trillion in loans and securities backed by loans (see Inman News story).

So now Fannie and Freddie can buy all the loans they want and the credit crunch is over, right? Actually Fannie and Freddie haven't even been pushing up against the caps, which the Office of Federal Housing Enterprise Overisght (OFHEO) loosened back in September.   

While the GSEs could each have grown their held-for-investment portfolios to $742 billion by the end of the year, they have actually been shrinking them in the last few months.

According to the latest numbers, Fannie's loan portfolio totaled $721 billion at the end of January, down from $732 billion in October. Freddie has also shrunk its retained investment portfolio from $732 billion last August to $717 billion in January.

What's going on? After noting that the porftolio cap has been lifted, the fine print in Fannie's monthly summary explains, "The size of our portfolio also may be constrained by market opportunities and regulatory capital requirements."

Thanks to consent orders put in place in 2004, in the wake of accounting and management scandals that forced both companies to restate several years of earnings, the GSEs are required to keep 30 percent more capital on hand for a rainy day than previously stipulated by law. 

That means Fannie and Freddie have been struggling to scrape up additional capital to cover mounting losses on bad loans and other investments, including hedges against changing interest rates.

Those capital requirements may put the brakes on what is a much bigger business for Fannie and Freddie than buying up loans -- guarantees and securitizations. In addition to buying up loans, the GSEs provide liquidity to mortgage markets by bundling up loans that meet their underwriting standards and selling them as guaranteed securities to other investors.

Most of Fannie's $2.9 trillion "book of business" at the end of January consisted of $2.44 trillion in outstanding MBS and other guarantees. The story is much the same at Freddie Mac. While Fannie and Freddie both grew their book of business at an ambitious annual rate of around 25 percent in December, things slowed down considerably in January -- to 9 percent at Fannie and 5 percent at Freddie.

With Fannie reporting a $3.6 billion fourth quarter loss today and Freddie expected to have equally bad news tomorrow, don't expect OFHEO will hurry to lift the 30 percent additional capital requirements that are proving to be the real constraint on the GSEs' growth.

OFHEO director James Lockhart today sounded triumphant about the orders that put the requirements in place in 2006, saying that in retrospect, they have helped ensure Fannie and Freddie "are in a much better capital position to deal with today's difficult and volatile market conditions and their significant losses."

Or as The Boss says:

"In the day we sweat it out in the streets of a runaway American dream
At night we ride through mansions of glory in suicide machines
...
Cause tramps like us, baby we were born to run"

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