To understand Wednesday's decision by federal regulators to let Fannie Mae and Freddie Mac set aside less cash to protect against losses, imagine a family that keeps its precious antique silver in a strongbox on a high shelf, beyond easy reach. The regulators have essentially authorized Fannie and Freddie to pawn some of their family silver.

Currently, the two firms, known as government-sponsored enterprises, or GSEs, have combined reserves of US$82 billion. This includes an extra amount that the regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), required them to hold while they got their books in order after accounting scandals. Now it is reducing that extra cushion by $5.8 billion. The newly freed-up money will leverage the purchase and securitization of up to $200 billion in home loans.

The point, however, is not to save Fannie and Freddie themselves but to use the two firms, which buy mortgages and resell bunches of them to investors in the form of bonds, to ease the difficulties of borrowers more generally. It’s as if our hypothetical family pawned its silver to help the neighbors out of a financial jam … This is risky. If all goes well, freeing up the GSEs will buoy mortgage lending, thus slowing or reversing the slide in housing prices … But if housing continues to tank, and the GSEs rack up new multibillion-dollar losses on top of those they have already incurred in recent months, they will have that much less in reserve to fall back on. The GSEs enjoy an implicit federal guarantee, but reducing their capital for a purpose such as this, at a time such as this, goes a fair way toward making that bailout promise an explicit one. (Washington Post, March 21)

CNBC's Maria Bartiromo: Some have been arguing that the blowup in Bear Stearns caused the Administration to reconsider policy responses to this crisis. The deal announced today is basically telling them that that is a fact - that it really was Bear Stearns that pushed the government’s hand. Is that true - was it Bear?

OFHEO director James Lockhart: Not really. We’ve been talking about this for a long time. I’ve been talking for many months about the need for these two companies to raise additional capital. And I’ve talked for over the last year that once they got remediated and fixed their books and got them on a timely basis, we would start looking at removing that 30% excess capital charge we had on.

Bartiromo: It seems to have taken a long time. A lot of people - from hedge fund companies to certainly the lenders - have wanted the restrictions eased for some time. What was the biggest barrier and what went away over the last several weeks in order to push your hand?

Lockhart: I think the key thing was three weeks ago they did actually produce their '07 financial accounts on a timely basis. And we’ve gone through all the consent agreement issues and they’re virtually finished on them as well. We thought it really was the appropriate time. They now have the proper systems and controls - proper risk management. And we think it really is a time they can help the mortgage market in a big way.

Bartiromo: We’re talking about a big number, too. Some $200 billion in the market. What’s the best case scenario, sir - what would you like to see - what specific mortgages do you want these two guys to buy?

Lockhart: Well, I think they should be a player in many segments of the market. I think certainly, as [Fannie chief executive] Dan Mudd just said, the conventional mortgage market has really weathered this storm pretty well because Fannie and Freddie have been there for the last year. But they could do more there. They’re just getting into the 'jumbo' market next month, and certainly they’ll need capital to do that. [A jumbo mortgage has a loan amount above the industry-standard definition of conventional conforming loan limits.] And there’s a lot more that could be done in the subprime - refinancing some of these people into safer mortgages. And, also, just loan modifications. So there are a lot of ways that this capital can be used to improve the mortgage market.

Bartiromo: Are you expecting the capital at all to be earmarked for some of the passthrough CMOs [collateralized mortgage obligation] - I mean the really troublesome securities that really did in Thornburg or Carlyle Capital or Bear Stearns, among others?

Lockhart: Carlyle Capital was actually holding Fannie and Freddie’s securities and the spreads widened dramatically - which they’ve probably come back this week. But I think they will be looking at buying their own mortgage-backed securities. They may look at some other mortgage-backed securities as well. I think we need to increase the trading. And as both of them said this morning, they need to be a bid in the marketplace to buy those securities.

Bartiromo: And just the idea that they are a bid in the marketplace to buy those securities obviously was really celebrated in terms of investors and the idea that now there is a buyer there. How long do you expect this process to take? And how long do you think it will take to actually get this moving - liquidity back into the market and a feeling of stability?

Lockhart: Well, it may take awhile. The mortgage market is one issue, but there are some other markets out there as well. I think this is going to be a major step forward. As you said, they can do $200 billion in purchases immediately. And to the extent they’re guaranteeing mortgage-backed securities - that could almost get into the trillions. We’re looking at that they would have the capacity - between what we did today and the significant capital raising that they committed to - they could do over $2 trillion in business this year if the market needs that money.

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