Fannie Mae and Freddie Mac capital requirements reduced

US regulators may reduce capital requirements imposed on Fannie Mae and Freddie Mac to help them expand their combined $1.5 trillion in investments and revive the market for home loan securities. Fannie Mae and Freddie Mac also agreed to raise more capital as part of the deal with the Office of Federal Housing Enterprise Oversight. Fannie Mae and Freddie Mac are required by Ofheo to hold an extra 30% capital cushion to protect against losses on the mortgages they own and guarantee. An easing could amount to an extra $200 billion to $300 billion of purchases from the companies. Fannie Mae climbed 27% and Freddie Mac jumped 26% yesterday. Fannie Mae posted a $3.55 billion loss and Freddie Mac posted a $2.45 billion loss in the fourth quarter, both records as rising foreclosures sent credit costs soaring net loss for the period. The capital surcharge is one of the last remaining restrictions imposed on the companies after $11.3 billion of accounting misstatements.

This will not end well. Expand their capacity to make more of the same investments that lost them $6 billion in a single quarter? And presumably they already bought all the best mortgages, so they'd be dipping into lower quality stuff at the margin. Bad, bad idea.