The Government has our Fannie covered!

Comments(0) By Mike Miller •September 11th, 2008

Last weekend, our government announced a “bailout” of both FANNIE MAE and FREDDIE MAC. This is an important event in our industry. I want to be sure I connect with you on some of the details, and answer any questions you may have.

What is Fannie Mae & Freddie Mac?
In simple terms, Fannie Mae and Freddie Mac buy mortgages from banks, savings and loans, credit unions, and other lenders to ensure that mortgage funds are consistently available for institutions to keep lending. Both government-sponsored and shareholder-owned, Fannie and Freddie do not have contact with consumers but instead work directly with lenders. Together, they hold or guarantee about half of the country’s outstanding home loans.

What Prompted This Bailout?
Home price declines and a rise in mortgage delinquencies and foreclosures have badly damaged the two entities. The companies recorded combined losses of $14 billion in the last year and their stocks have plunged in that same timeframe each from the mid $50s to the mid-single digits. “The capacity of their capital to absorb further losses while supporting new business activity is in doubt,” said James Lockhart, head of Federal Housing Finance Agency, which will now oversee the two companies. If they had failed, the damage to the mortgage and housing markets could have had a catastrophic effect on the economy and could have hurt Americans’ ability to secure home loans, auto loans, and other consumer credit, Treasury Secretary Henry Paulson said in a press conference yesterday. “The government’s rescue plans are necessary steps to help strengthen the U.S. housing market and promote stability in our financial markets,” Federal Reserve Chairman Ben Bernanke said in support of the government takeover.

What is the Plan?
The plan is a “time out” to stabilize the two companies. The two companies will be run by the government, indefinitely. The two current chief executives have been replaced and the government will invest up to $100 billion in each firm to keep them solvent. In addition, to improve the availability of mortgages, the U.S. Treasury will start buying Fannie and Freddie’s mortgage-backed debt in the open market. Beginning at the end of the first quarter of 2010, the two firms will start repaying the U.S. Treasury on a quarterly basis. In addition, Fannie and Freddie’s retained mortgage and mortgage-backed securities portfolio may not exceed $850 billion as of the end of 2009 and must decline 10% per year until it reaches $250 billion.

What’s Next?
It’s clear that the bailout will prevent catastrophic results in the mortgage market but the long-term benefits remain to be seen. We know that the 30-year fixed mortgage rate fell yesterday as a result of this weekend’s actions. We know that bringing Fannie and Freddie under government control “is a necessary step in maintaining liquidity in the housing finance sector and hopefully improving affordability via a much-needed reduction in mortgage rates,” writes David Rosenberg, Merrill Lynch North American economist. We don’t know how this effort will affect housing prices. As more information comes available I will certainly share it with you. In the meantime, please call or reply to this email if you have questions or would like to discuss this development further.

No related posts.