Mortgage backers’ caps lifted

WASHINGTON – Fannie Mae and Freddie Mac will be allowed to expand their roles in the turbulent mortgage market even as worsening conditions in the housing sector punish the two companies.

Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected today to report a $1.5 billion fourth-quarter loss, according to Wall Street estimates.

Under a previous agreement with federal regulators, the timely filing of Fannie’s and Freddie’s financial results triggers the removal of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the government-sponsored companies.

Analysts said the impact will be limited, however, because of the large cash cushion Fannie and No. 2 mortgage financer Freddie must maintain as a reserve against risk. Tightness in credit markets makes it expensive for Fannie and Freddie to marshal additional funds.

Fannie, which gave a pessimistic housing outlook for 2008, said close to 90 percent of its fourth-quarter losses stemmed from investments it made based on the assumption that falling interest rates would cause mortgage values to appreciate.

“The housing conditions are serious and they’ve gotten worse,” said the company’s president and CEO, Daniel Mudd.

The government “clearly is responding to pressure to open up Fannie and Freddie’s ability to buy loans,” said Bob Walters, chief economist with Quicken Loans, a mortgage company based in Livonia, Mich.