OFHEO's Part in the Housing Crisis

According to the WSJ, Freddie Mac has serious capital-adequacy problems, and they're basically the fault of the Office of Federal Housing Enterprise Oversight:

The losses have left the company with core capital of $34.6 billion as of Sept. 30, only $600 million above the minimum amount it is required by regulators to hold. The regulatory agency, the Office of Federal Housing Enterprise Oversight, has imposed minimum capital levels for Fannie and Freddie that are 30% above those required by law. The capital "surcharge" came in the wake of accounting scandals at both companies in recent years.
Because it had little margin over its capital requirement, Freddie said it was limited in its ability to take advantage of opportunities to buy mortgages and sold about $20 billion of them in September and another $25 billion in October.

That's right, because OFHEO is being strict with Freddie, it's being forced to sell tens of billions of dollars' worth of mortgages. Freddie should be part of the solution to this mortgage-bond crisis; instead, it's contributing significantly to the magnitude of the problem. Freddie should be a source of liquidity in the market, not a forced seller.

This is all wrong. The reason why capital-adequacy rules exist is to make sure that there's a cushion in times of crisis. Well, guess what – this is a time of crisis. The capital-adequacy rules should be loosened, but instead OFHEO is sticking to its decision to impose significantly tighter requirements on Freddie.

This is no time to be punishing Freddie for past accounting irregularities – or even present accounting irregularities, for that matter, if such things existed. Let's keep our eyes on the prize, people. Fannie and Freddie can and should be using their deep pockets and their mortgage expertise to buy up undervalued and fundamentally-curable distressed mortgages, both above and below $417,000, at less than the mortgages are worth but more than the market is asking.

Instead, they're dumping mortgages onto the secondary market in order to comply with OFHEO's capital-adequacy requirements. There's a time and a place for those kind of requirements, and it is emphatically not now.

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