3rd UPDATE: Treasury Boosts Funds For Fannie,Freddie To $200 Billion Each

The U.S. Treasury Department on Wednesday said it is increasing its funding commitment to Fannie Mae (FNM) and Freddie Mac (FRE) to $200 billion each as part of a broad plan to ensure confidence in the two institutions and boost the housing market.

Specifically, Treasury is amending the Preferred Stock Purchase Agreements it has with the government-sponsored enterprises to $200 billion each from the original level of $100 billion each.

Treasury made clear that it is boosting the funding by using new powers provided by the Housing and Economic Recovery Act - not the controversial, $700 billion financial sector rescue Congress authorized last year. The housing law, which was enacted last summer, included a dramatic rescue plan for Fannie and Freddie amid growing market concerns about the firms' solvency and capital.

Among other things, the plan extended the government's line of credit with the GSE's and enabled Treasury to take an equity stake in the firms.

Treasury said it is increasing the GSE's funding to provide assurance to market participants.

"The increased funding will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners," said Treasury Secretary Timothy Geithner in a statement.

The firms' regulator, the Federal Housing Finance Agency, said in its own release that the additional funding commitments should help keep interest rates low for both current and prospective borrowers.

"Resetting these agreements...should remove any possible concerns debt and mortgage-backed securities investors have about the strong commitment of the U.S. government to support Fannie Mae and Freddie Mac," FHFA Director James Lockhart said in a statement.

Additionally, Treasury said it will increase the size of the GSEs' retained mortgage portfolios allowed under the stock purchase agreements by $50 billion to $900 billion, along with corresponding increases in the allowable debt outstanding.

Geithner said the funding boost "is not intended to indicate any estimate of possible losses with respect to the companies." Instead, the action is meant to prove to the markets that the Treasury stands firmly behind the GSEs' ability to support housing finance, even in the midst of market difficulties, the secretary said.

Treasury noted that neither firm is near the current $100 billion limit for funding from Treasury under the stock agreements.

Based on preliminary disclosures from the last quarter of 2008, total funding provided to Freddie could approach $50 billion and total funding for Fannie could approach $16 billion, it said.

The GSE announcement is part of the Obama administration's broad homeownership affordability plan designed to help up to 9 million families restructure or refinance their mortgages to avoid foreclosure.

The plan also includes a $75 billion stability initiative to help homeowners who make reasonable monthly mortgage payments to stay in their homes. Under the program, a lender ideally would help bring down interest rates so a borrower's payments are no more than 38% of his or her income. The government would then match further reductions in interest payments in order to bring that ratio down to 31%.

-By Maya Jackson Randall and Jeff Bater, Dow Jones Newswires; 202-862-9249