The mortgage and residential real estate market has been in a continued state of correction for the last couple of months. The government has been intervening in the financial, housing, and mortgage markets to stave off any further troughs on the horizon. A new plan is afoot by the government to inject $200 billion in financing to the mortgage markets, after federal officials from the Office of Federal Housing Enterprise Oversight (OFHEO) stated that Fannie Mae and Freddie Mac will reduce the capital they keep on hand.

Fannie Mae and Freddie Mac are government backed companies that buy mortgages in the secondary market from primary mortgage lenders. This task is important in maintaining a growing mortgage and housing market as Fannie and Freddie provide much needed financing to mortgage lenders looking to make home loans.

However, the companies don’t purchase jumbo loans. Until recently, any mortgage loan equal to or greater than $417,000 was considered a jumbo loan. The two companies play a crucial role in creating homeownership and mortgage refinancing opportunities for individuals.

The federal government sees opportunities to help homeowners and shore up the mortgage arena by reducing the cash Fannie and Freddie keep on hand. Even though such action raises risk for the two companies which are critical to the functioning of international financial markets, the move by policymakers is seen by the markets as a positive one.

The new move will free up Fannie Mae and Freddie Mac to purchase or guarantee $2 trillion in home loan mortgages. The governmental steps are necessary to re-establishing the funds pipeline that flows from the home buyer or mortgage refinancer to the mortgage lender and then to the investor.

Congress has raised limits on the loans Fannie and Freddie can buy from $417,000 to $729,750. The new limits provide opportunities for lower mortgage rates for homeowners who earlier couldn’t get lower interest rates on their mortgages.

The new home loan rules are seen as essential steps in maintaining liquidity in the credit markets and forestalling a potential economic trough. The lower capital limits signal a shift in thinking of the Bush administration from the more laissez-faire school of economic thought. Currently, President Bush is willing to move forward on policies that he had previously dismissed.

Wall Street has hailed the moves by the government as steps in the right direction with regards to protecting the financial system and homeownership. The initiatives will help new home loan borrowing and mortgage refinancing.