Easier GSE capital may spur $158 bln purchases-Citi

By Al Yoon

NEW YORK, March 7 (Reuters) - A modest drop in capital requirements for Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) would let the biggest U.S. home loan funders boost mortgage purchases as much as a combined $158 billion, according to Citigroup Global Markets.

Capital constraints on the government-sponsored enterprises have prevented the companies from stabilizing the $4.5 trillion market for "agency" mortgage bonds, which is under pressure from hedge fund liquidations and slack demand from banks and Wall Street. Yields on their securities have risen to their highest in more than two decades, producing a premium on mortgage rates.

Speculation that capital mandates would be reduced came after the Office of Federal Housing Enterprise Oversight said last week it would discuss a "gradual" decrease, and removed caps on the investment portfolios. Fannie Mae and Freddie Mac have made progress in fixing weak risk controls and accounting errors that led to the tougher capital requirements in 2004, OFHEO said.

A drop in the excess capital mandate to 25 percent from 30 percent for Fannie Mae would free up enough capital to support up to $86 billion in its $721 billion portfolio, Citigroup's Bradley Ball said in a March 6 research note.

For Freddie Mac, a lower mandate could result in $72 billion of purchases for its $717 billion portfolio, he said.

The regulator's "new flexibility vis-a-vis the GSEs' capital requirements is a positive which could allow for meaningful retained portfolio growth," Ball wrote.

GSE executives said last week they would be conservative with capital that has been eroded by credit-related losses on their portfolio and guarantee obligations on mortgage-backed securities. Both pointed to their MBS businesses, which require less capital backing, and are growing rapidly as lenders increasingly rely on the programs.

Fannie Mae could support up to $480 billion in guarantee business growth with a 25 percent capital surplus requirement, Ball said.