Fannie, Freddie inspire investors

WASHINGTON - Shares of Fannie Mae and Freddie Mac climbed anew Friday, signaling the market's belief that federal regulators will ease investment limits on the two home-loan finance giants as a way to pump cash into the struggling mortgage market.

The Office of Federal Housing Enterprise Oversight is considering a request by Fannie - bolstered by urgings by key Democratic lawmakers in recent days - to raise by about 10 percent the mandated cap on its mortgage investment holdings, now at around $727 billion.

Freddie, the other government-sponsored player in the $8 trillion home-mortgage market, also wants to see its limit, now $724 billion, lifted.

Wall Street is optimistic the independent regulator will do so, driving Fannie's stock price 17 percent higher in the past week, while pushing up Freddie's shares by 11 percent. The Bush administration, though, opposes the idea: President Bush said the greater priority is putting a tighter government rein on Fannie and Freddie's operations.

Arvind Sachdeva, senior portfolio manager at Victory Capital Management, was skeptical of investors' apparent assumption that regulators will ease the investment limits on Fannie and Freddie. "I wonder if it's more, at the moment, hope than anything else," he said.

Sachdeva called it "almost incomprehensibly ironic" that Fannie and Freddie, criticized for years by many officials and lawmakers as posing risk to the financial system, now are viewed as the "solution" for the mortgage markets.

In action meant to soothe the turmoil gripping Wall Street, the Federal Reserve announced that it will pump as much money as needed into the country's financial system. The central bank pushed

$35 billion in temporary reserves into the system Friday morning, on top of a similar move the day before.

The chief executive of Washington-based Fannie Mae made the case for action by the housing regulatory agency, promising that the company could help turn up the taps in a market where cash has been drying up.

"We believe that a moderate increase (in the portfolio cap) in the range of 10 percent is appropriate given both current market conditions and the importance of prudent market practice," President and CEO Daniel Mudd said in a statement issued Friday. "We believe this action, in conjunction with actions taken by the Federal Reserve Board and others, would help to alleviate the ongoing credit crunch in the markets and bring an additional measure of stability."

OFHEO officials have not made any public statements on the matter. Spokesmen there and at McLean, Va.-based Freddie Mac declined any comment Friday as the two companies' shares rose in an otherwise skidding market.

Shares of Fannie gained 53 cents to $66.46, ending the week near the upper end of its 52-week trading range of $47.17 to $69.94. Shares of Freddie rose 28 cents to $61.95, trading in the middle of its 52-week range of $54.97 to $71.92.

Both companies were roiled by multibillion-dollar accounting scandals in recent years, which prompted the regulators to install the ceilings on how much mortgage debt they can take on.

Prominent Democratic lawmakers, including the chairmen of the House and Senate banking committees, have urged the regulators to ease the collars on Fannie and Freddie.

"There is no reason why" a congressional overhaul of Fannie and Freddie should be a precondition to a lifting of the portfolio caps, said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee and a candidate for his party's presidential nomination.

On the other side, Rep. Richard Baker, R-La., a longtime critic of the companies, urged caution. "We have to weigh whatever marginal liquidity they would add to the market against this greater concentration of credit risk," he said.