The regulator for Fannie Mae (FNM), Freddie Mac (FRE) and the 12 federal home loan banks will propose new financial regulations for the entities next week.

A federal housing law enacted last summer requires the regulator, the Federal Housing Finance Agency, to revamp the capital requirements for all 14 institutions within six months as well as propose new rules governing the portfolio holdings of Fannie and Freddie.

FHFA Director James B. Lockhart told Bloomberg News Friday that he would unveil draft regulations next week. He also expects both Fannie and Freddie, which were seized by the government last September, to require cash infusions from the Treasury after they post their fourth quarter results.

"I think everybody would expect that there would be a draw on Treasury," Lockhart told Bloomberg.

When Fannie and Freddie put under the conservatorship of their regulator, Treasury agreed to pump $200 billion of capital as needed into the firms to keep them solvent in exchange for preferred stakes in the companies.

Freddie Mac has already received a $3.8 billion injection from Treasury, after posting a more than $25 billion loss in the third quarter. Fannie Mae hasn't yet tapped Treasury funds.

It is unclear what, if any, impact the new requirements will have on Fannie and Freddie. They could remain in the limbo of conservatorship for years, during which time any new capital requirements and restrictions on holdings would be unlikely to apply. After seizing the firms, Lockhart promptly waived their current capital requirements.

Meanwhile, as a covenant of Treasury's agreement to pump money into the firms, Fannie and Freddie are required to begin steadily shrinking their portfolios to $250 billion at the end of the year.

Also, the new restrictions could be moot if Fannie and Freddie don't reemerge from conservatorship in their previous forms.

By contrast, new capital requirements for the home loan banks could take effect much sooner, though not likely this year. The banks, which are a major source of funding for thousands of commercial banks, thrifts and credit unions across the country, have come under pressure due to losses tied to the plunging market value of investments in mortgage-backed securities.

Under accounting rules, banks have to mark down certain securities holdings to their current market value, even though they may intend to hold them to maturity. Yet since the onset of the financial crisis in August 2007, investors have fled all types of assets, causing the market value of certain investments to plummet even though they are still generating cash.

The rules are straining several home loan banks, some of which have suspended dividend payments to conserve capital. The federal home loan banks of Seattle and Pittsburgh warned recently they may fail one of their capital tests.

Analysts argue that the situation isn't necessarily cause for alarm. In a recent report, Moody's Investors Services estimated losses on the home loan banks' investments wouldn't reach $1 billion. Analysts at Barclays Capital said the eventual losses on the securities could be less than $5 billion.

As of Sept. 30, the home loan bank system had $57 billion in capital, more than enough to cushion against such losses.

Lockhart said Friday he planned to revamp the risk-based capital test for the federal home loan banks, which factors in the market value of bank investments. It is one of three capital tests that 11 of the 12 banks must submit to; the Federal Home Loan Bank of Chicago is only subject to one test.

The federal home loan banks' business has exploded in the last 18 months, as other sources of bank credit have dried up. They increased their lending to financial institutions to about $1 trillion as of Sept. 30 from $641 billion at the end of 2006.

Despite their increased exposure to the troubled U.S. banking system, the home loan banks have performed well in the last 18 months, Brian Harris, a Moody's analyst, said.

The home loan banks have avoided losses by demanding more in collateral than they are delivering in advances to member banks, Harris said. Regulators have also historically put them ahead of other creditors when banks fails. With the collapse of Washington Mutual (WAMUQ) and IndyMac Bancorp (IDMCQ), all home loan bank advances were paid off or assumed by another party.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com

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