Real Trends View on Freddie Mac/Fannie Mae
September 8th, 2008 categories: For Buyers
Real Trends just sent a great email explaining the current situation with Freddie Mac and Freddie Mae. No use reinventing the wheel to explain what is going on…..
Thanks to Real Estate Trends:
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| U.S. Treasury Department Announces Takeover of Fannie Mae; Freddie Mac |
It’s been the talk of Wall Street for months, but it’s now official. Much to the relief of those in the real estate industry, on September 7, 2008, the U.S. Treasury Department announced its takeover of mortgage-finance companies Fannie Mae and Freddie Mac. From it should come a much-needed boost to the nation’s housing market.
Fannie Mae and Freddie Mac, which together back around $5 trillion in home loans, have been battered in the past year by declining home prices and rising foreclosures. The four-part rescue plan will be set up as a conservatorship to be overseen by the Federal Housing Finance Agency.
Lawmakers from both parties indicated strong support for the steps according to The Wall Street Journal and New York Times. The plan commits the government to provide upwards of $100 billion in additional capital although none is needed right away. The government will be issued special 10% yield preferred shares and receives warrants equating to 79.9% of the common shares of the two companies. According to Treasury Secretary Paulson the longer term plan is to first cap the amount of each company’s mortgage portfolios at $850 billion and then shrink them to the neighborhood of $250 billion a move that some lawmakers said would not happen.
“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” says Treasury Secretary Henry Paulson, Jr. “This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”
Paulson refused to say how much capital the government might eventually have to provide, or what the ultimate cost to taxpayers might be. However, CNNMoney.com said the move would extend as much as $200 billion in Treasury support to the two companies.
Stock markets around the world reacted favorably to the news. It is expected that mortgage rates may ease somewhat with this move as markets are reassured of the long term viability of the secondary market supported by Fannie Mae and Freddie Mac.
Fannie and Freddie CEOs Daniel Mudd and Richard Syron respectively will be replaced. Herb Allison, former chairman and CEO of pension provider TIAA-CREF will take the top position at Fannie Mae while Carlyle Group (a private equity firm) senior advisor David Moffett will take over Freddie Mac.
REAL Trends Comment: The uncertainty surrounding the future of Fannie Mae and Freddie Mac would seem to be less now than it was Friday. However, now that the Federal government has control of these monetary giants what we don’t know is how much this control will affect their operations in the secondary market. Will a more robust private market develop, a long sought objective of Wall Street (and the current Treasury Secretary)? |
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| Steve Murray, PublisherTracey Velt, EditorREAL Trends, Inc. Questions or Comments? please send us an e-mail realtrends@realtrends.com |
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Posted by Kathy Koops |
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