Fannie Mae and Freddie Mac's regulator is loosening their capital requirements. This is, I think, the correct call. It is possible that Fannie and Freddie can stablize mortgage credit markets by refinancing loans--particularly Jumbos--and mitigate house price declines in coastal markets (I don't think Florida and Inland California can be helped much).
I am not saying this will work, but if OFHEO had done nothing, we could be sure of a taxpayer bailout. At worst, the reduction in capital requirements will leave taxpayers no worse off. At best, the reduction could make everyone better off. This means that the expected impact of the policy decision is positive.
That said, Fannie and Freddie should now have their feet held to the fire about meeting their mission of liquidity provision.
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