Fannie & Freddie’s New Role
by Rich Epstein on July 31, 2008
The new housing rescue bill signed Wednesday takes aim to bolster Fannie Mae and Freddie Mac. In a late additon to the bill, the law allows authority for the Treasury to lend a financial hand to Fannie Mae and Freddie Mac if it deems it necessary to help stabilize markets.
For starters, a more strict regulator will be assigned for Fannie Mae & Freddie Mac: The new regulator will have a greater say over how well funded the two government sponsored enterprises are -a major concern in the markets that has sent stocks in both companies plunging in the past two months. Concerns over whether Fannie Mae and Freddie Mac will have enough money to weather future losses in the housing market has sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade last Friday.
Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.
The law includes provisions that let Treasury offer Fannie and Freddie an unlimited line of credit and buy stock in the companies. The provisions expire in 18 months.
Both critics and supporters of the plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay. The potential cost of a rescue could be $25 billion.
What you must understand here is that the Treasury will NEVER let Fannie and Freddie fail. If these companies collapse, no one in this country will be able to get a mortgage. Maybe that’s an overstatement, but not by a lot. Fannie and Freddie back for the most part solid loans with their stipuations on ability to qualify, etc. They represent the prime loans rather than the riskier ones which is what caused all of this mortgage brouhaha.
The riskier loans (enter any synonym for sub-prime here) went to Wall Street for investors. And here’s where it hit the fan. Take a company like Countrywide who’se modus operandi was sell a loan at any cost with no regard for the client. (watch video here) Well, investors were well fed right up until many of the loans turned sour and they became less than a great investment – ask Bear Stearns how that worked out, and the money dried up.
So, if the sub-prime as we knew it is gonzo and Fannie and Freddie can’t write the prime loans…that doesn’t leave many mortgage options for most Americans. And if we think this current little “hiccup” has torched the economy, wait until that happens.
So, no, the Treasury will never let Fannie & Freddie fall, hence the unlimited lines of credit, etc.
