US regulators free Fannie Mae to buy up mortgages

United States regulators have ripped up longstanding restrictions on the government-sponsored mortgage companies Fannie Mae and Freddie Mac, freeing them to buy significantly more mortgages and pot-entially to reinvigorate the secondary market for mortgage debt.

The news came as Ben Bernanke, chairman of the Federal Reserve, warned that the housing market will continue to act as a drag on the economy for several more months, and after data showing sales of new homes in January were down by more than a third on last year.

The Office of Federal Housing Enterprise Oversight, Ofheo, said it was ending a cap on mortgage purchases that it imposed in 2004 after accounting irregularities at Fannie Mae and Freddie Mac. The two companies operate under a government guarantee, buying up, repackaging and re-selling mortgages in order to stimulate lending activity.

Politicians have complained since the start of the credit crisis that the caps were constraining the two companies just when they were most needed. Ofheo said it would also gradually reduce the amount of capital the two companies are required to set aside to cover their loans.

Its move came after Fannie Mae filed its annual results on time for the first time in several years, posting a $3.6bn (£1.8bn) fourth-quarter loss because of rising mortgage arrears.

Increased activity by Fannie Mae and Freddie Mac in the secondary mortgage market should help bring down interest rates for homebuyers and encourage lenders to make more loans available – a prospect that encouraged bullish stock market investors to bet on an early end to the housing market slump.

Mr Bernanke had just delivered another downbeat assessment of the housing market on the first of two days of testimony before US lawmakers on Capitol Hill. He told the House of Representatives' Financial Services Committee: "The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries."

The Fed has slashed US interest rates from 5.25 per cent to 3 per cent since September to try to prevent lower house prices from affecting consumer sentiment and infecting the rest of the economy, and Mr Bernanke reinforced his message that the central bank stood ready to act again "to provide adequate insurance against the downside risks".

Sales of new homes in the US in January were at their lowest since 1995. The number of transactions fell 33.9 per cent on the previous January, and the average price was 15.1 per cent lower, the Commerce Dep-artment said.

"Ceaseless talk of a recession continues to dampen the mood of consumers in general, whether or not a recession actually occurs," said Robert Toll, the chief executive of the luxury housebuilder Toll Brothers, which posted a quarterly loss yesterday. "For home buyers, we believe this drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines."