Update: Fannie-Freddie rally fades

A frenetic rally in shares of Fannie Mae (FNM) and Freddie Mac (FRE) eased as Wall Street mulled over the details of a regulatory decision to lift caps on the growth of their mortgage portfolios. After earlier rising as much as 16 percent, Fannie and Freddie had given up all their gains and were unchanged action.

Wednesday’s move by the Office of Federal Housing Enterprise Oversight could allow the companies to expand their purchases of mortgage securities. Legislators have been hoping they’ll do just that in a bid to ease the pain of the housing crisis. But merely lifting the mortgage caps is just a first step in the eyes of some. Sen. Chuck Schumer, who last year sponsored legislation that would have forced OFHEO to raise the companies’ mortgage caps, now wants the regulator to reduce the amount of capital it forces the companies to hold to cushion against future losses.

“This is a long overdue step, but certainly a welcome one,” Schumer said in a press statement. “Just as important is OFHEO’s willingness to ease the capital surcharge requirements that continue to hamstring the GSEs. OFHEO should announce a plan to lift that surcharge immediately.”

OFHEO chief James Lockhart has indicated he’s open to reducing the capital surcharge, but not just yet, amid worries that a declining housing market will stick the companies with billions of dollars in credit losses and writedowns of derivative positions. Wednesday morning’s financial update, in which Fannie Mae said it lost $3.56 billion for the fourth quarter, shows those concerns aren’t going away any time soon.