What Happens Now With Fannie and Freddie?

The following post is from Stephanie Hanna, a lender we work with. It provides an inside the lending industry view on the latest government actions to save Fannie and Freddie.

It’s official. On Sunday, Treasury Secretary Paulson placed Fannie Mae and Freddie Mac into the conservatorship of the Federal Housing Finance Agency (not be confused with the Federal Housing Administration, better known as FHA). The term conservatorship used in this context refers to a statutory process designed to stabilize a troubled institution. So what does this all mean to the mortgage markets?

  • Well, the announcement alone meant that we saw a large decrease in mortgage rates. For the first time in a couple of months, I can now offer borrowers an interest rate below 6% with no points.
  • Before the month is over the Treasury Department will become a major buyer in the conforming mortgage-backed securities market — it’s this action that will steadily to fractionally lower mortgage interest rates.
  • Business will go on as normal for both companies — with the added strength of the U.S. government directly backing up all financial transactions.
  • Both companies will be allowed to grow their book of business that guarantees mortgage-backed securities without limits while also operating with the authorization to purchase about $20 billion per month of new production to replace run-off in their portfolios.

Additional highlights:

  • The U.S. government assumes control over the Board and management.
  • Current Fannie Mae and Freddie Mac CEOs are being replaced, but will stay on through a transition period.
  • There will be limited initial management actions — they will work with the current management team, and the vast majority of employees should be asked to stay on in their respective positions.
  • There will be no dividends paid on preferred or common stock.
  • All lobbying/political activity by the GSEs will cease.

It would be unrealistic to expect that this transition will be completely flawless. But the resources of the Federal Housing Finance Agency, the Treasury Department and the Federal Reserve will come together to support and promote the dream of American home ownership. While this step by the government brings one era to an end, it also shines some light on a promising new one.

Stephanie Hanna
775 762 9114
shanna [at] platinum1st.com

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3 Responses to What Happens Now With Fannie and Freddie?

  1. Avatar Steve says:

    Can we get over this American dream thing already. It is a dream only for the lender who gets 2-3 times the principal over the course of 30 years. Who cares if i buy or rent. A home is not an asset unless it generates positive cash flow, period. for most and I mean most a home only serves as a grandiose savings account, but not even that is true anymore as there is little or no equity left.

    Bushco decided in 2003 or so that the american liftstyle could no longer be supprted by income so the credit spigots were opened, this led to debt and depletion of savings.

    baahh, humbug

    oh yeah of course only in a materialistic society would self worth and happiness be tied up to a parcel and 2x4s

  2. Avatar DonC says:

    It’s the ripple effects that are a bigger concern. Regional banks and S&Ls holding preferred stock may have financial problems since preferred stock is Tier 1 capital and the stock is now (mostly) worthless.

    Credit swaps are also problematic. There is something like 1.4 to 1.6 trillion (not a typo) dollars in credit swaps which are now payable because the takeover has been deemed an insurable event. Someone somewhere is going to have to cough up a trillion and a half dollars in payouts.

    Are the entities which wrote the protection capable of paying one and a half trillion? Doubtful. Which means those entities carrying the payouts on their books as assets are going to have to write down those assets. And the entities writing the protection — entities you would never think of as being in the residential real estate market — may be wiped out.

    So far things have been stable because the debt is trading almost at face value. The entity writing the protection gets the debt in return for the payout and can resell it for about what it paid out in protection. But if that changes things will get very ugly in a hurry.

    Individuals may find themselves with more exposure than they thought they had. From personal experience funds like Vanguard Wellington and Dodge & Cox Stock, which are considered to be conservative, had large equity which have been more or less wiped out. Ouch.

  3. Avatar Sully says:

    For those of you with Nevada addresses, you can send an email to Rep Heller as he is on the Finanial Services Committee.

    Ask him if he has any thoughts about repealing the Banking Act of 1999 or formally Gramm-Leach-Bliley Financial Services Modernization Act of 1999. This act repealed the Glass-Steagall Act of 1933 which would have prevented this speculation that helped create the housing bubble.

    BTW, don’t hold your breath waiting for an answer, apparently this is a sore point with the committee. 🙂

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