Perverse Lessons From The Credit Crunch: Fannie And Freddie Get Riskier

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This morning we learned that the government seems to have learned exactly the wrong lesson from the recent turmoil in the credit markets. Government policies to expand homeownership—remember the once-vaunted “ownership society” that President George Bush and his friends thought would make us all more responsible capitalists?—helped produce irresponsible mortgage lending, which fueled the massive build-up of securitized credit products, which unbalanced the balance sheets of our financial institutions, which…stop us if you’ve heard this one before.
Oh, right. Of course you have. Anyway, now the regulators in charge of mortgage lenders Fannie Mae and Freddie Mac have decided that what these institutions really need are less stable balance sheets and more leverage. And so they’ve decided to loosen key capital requirements that have been restraining the mortgage companies. Fannie Mae may now increase its leverage to 33-1 from about 30-1.
The move is being hailed by some as providing some additional government-backed cushion for the credit crisis. Which only confirms the fact that in the minds of many the solution to the problem of debit is always more credit. Well, looks like we’re going to get it, good and hard.
Official Statement from Office of Federal Housing Enterprise Oversight [OFHEO.gov]
Fannie, Freddie Surplus Capital Requirement Is Eased [Bloomberg]
Fannie and Freddie Get a Little Room to Breathe [Market Movers]

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