OFHEO’s Part in the Housing Crisis

According to the WSJ, Freddie Mac has serious

capital-adequacy problems, and they’re basically the fault of the Office

of Federal Housing Enterprise Oversight:

The losses have left the company with core capital of $34.6 billion as of

Sept. 30, only $600 million above the minimum amount it is required by regulators

to hold. The regulatory agency, the Office of Federal Housing Enterprise Oversight,

has imposed minimum capital levels for Fannie and Freddie that are 30% above

those required by law. The capital "surcharge" came in the wake

of accounting scandals at both companies in recent years.

Because it had little margin over its capital requirement, Freddie said it

was limited in its ability to take advantage of opportunities to buy mortgages

and sold about $20 billion of them in September and another $25 billion in


That’s right, because OFHEO is being strict with Freddie, it’s being forced

to sell tens of billions of dollars’ worth of mortgages. Freddie should

be part of the solution to this mortgage-bond crisis; instead, it’s contributing

significantly to the magnitude of the problem. Freddie should be a source of

liquidity in the market, not a forced seller.

This is all wrong. The reason why capital-adequacy rules exist is to make sure

that there’s a cushion in times of crisis. Well, guess what – this is

a time of crisis. The capital-adequacy rules should be loosened, but instead

OFHEO is sticking to its decision to impose significantly tighter requirements

on Freddie.

This is no time to be punishing Freddie for past accounting irregularities

– or even present accounting irregularities, for that matter,

if such things existed. Let’s keep our eyes on the prize, people. Fannie and

Freddie can and should be using their deep pockets and their mortgage expertise

to buy up undervalued and fundamentally-curable distressed mortgages, both above

and below $417,000, at less than the mortgages are worth but more than the market

is asking.

Instead, they’re dumping mortgages onto the secondary market in order to comply

with OFHEO’s capital-adequacy requirements. There’s a time and a place for those

kind of requirements, and it is emphatically not now.

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