What the Fannie and Freddie Takeover Means for Home Buyers
With their hands on about half of all mortgages in the United States, totaling an estimated $5 trillion, lending giants Fannie Mae and Freddie Mac have a huge impact on swinging the housing pendulum. And with U.S. Treasury Secretary Henry Paulson's announcement on Sunday of the government's takeover of the two leading lenders, the critical shift will be felt in every neighborhood and city across the country.
Industry experts say the takeover will be good news for those looking to buy a home or hoping to refinance their mortgages if it leads to lower interest rates. But for homeowners already behind on their mortgage payments or who owe more than what their homes are now worth, the plan unveiled Sunday by Paulson offers little in the way of extra relief.
Freddie and Fannie's history
The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, were created by Congress decades ago to provide a steady stream of money for home mortgages. They're unusual hybrid entities: private companies traded on the stock market that also operate as government-sponsored enterprises, or GSEs. with an implicit guarantee of backing by the federal government.
Fannie and Freddie borrow money in the bond markets to buy mortgages from lenders. Because of the government's support, Fannie and Freddie can borrow at very low interest rates. But the housing collapse and a skyrocketing foreclosure rate have undermined the financial markets' confidence in the two companies that underwrite half the nation's mortgages.
The lending giants also play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders like Bank of America, Wells Fargo and Washington Mutual to make more loans.
The future of the mortgage market
The Associated Press reported that by placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies' debt is as safe as the Treasury Department's. The plan also replaces the management of the two companies.
Some financial experts say the government bailout will speed up the housing market's recovery by allowing mortgage rates to fall and make them more available to potential home buyers. The current rate on a conventional 30-year fixed mortgage is lingering around 6.35 percent, but rates are expected to fall as much as a half percentage point with the new government takeover.
In July, congress granted the Treasury, Federal Reserve and Federal Housing Finance Agency new authority with respect to Fannie Mae and Freddie Mac. Paulson said since that time, 'the treasury has closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, the government agencies have determined that it was necessary to take further action.'
What the plan entails
The news of the takeover was first reported on The Wall Street Journal Web site after stock markets closed Friday. In after-hours trading, Fannie Mae's shares plunged $1.54, or 22 percent, to $5.50. Freddie Mac's shares fell $1.06 to $4.04, nearly 21 percent. The companies' common stock will be worth little to nothing after the government's actions.
The news also followed a report by the Mortgage Bankers Association that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
The New York Times reports that the government's four-step plan commits to providing as much as $100 billion to both Fannie and Freddie to backstop any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost. It bans them from lobbying the government, putting an end to their ability to use their political machine on Capitol Hill.
It also eliminates dividend payments to current shareholders while protecting the principal and interest payments on the debt, now held by foreign central banks, financial institutions, pension funds and others.
The Treasury will force both companies to shrink their mortgage portfolios over the long term. In addition, the government plans to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month. This step, never before taken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages. This could be the jump start the national housing market needed to get back on track.
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Comments
Jan - It appears today's (09-08-2008) move by the Federal Government to now takeover as conservator of Fannie and Freddie will cost taxpayers untold money. This move is also seeing the installment Herbert Allison, former CEO of TIAA-CREF, as new CEO of Fannie and David Moffett, former vice chairman and chief financial officer at U.S. Bancorp will take Freddie as the government's hand-picked heads. I am nervous that this slippery slope has now become even more precarious with the Federal Government not only taking control but installing its own successors. While the former CEO's of both Fannie and Freddie needed replacement I am not sure that the Federal Government needs to be the one calling all the shots. While the demise of Fannie and Freddie would be difficult, the Federal Government has a regulatory place in retail banking, not an operational one; and certainly not on this large of a scale. The government already cannot manage money and balance budgets, I think today's move, while well intended, will not help current homeowners who are struggling; it will help the two largest lenders who have contributed to the mess. We must remember that these two lenders set the guidelines and now they want a "do over" at taxpayer expense! NO THANKS! The government should be helping homeowners, not the corporations who fostered the problem!
Not only has the government moved into an operational role, but they have seen it fit to reward the previous heads of these corporations handsome compensation packages. The plan as it stands seems to benefit current homeowners and new home buyers. The struggling families that have already lost their homes seem to have no remedies with this bailout.
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