Fannie and Freddie Find Santa Claus
On Christmas Eve the Treasury Department announced that it was lifting the caps that limited the amount of available capital for Fannie Mae and Freddie Mac. Prior to Christmas Eve, each company was limited to $200 Billion of capital from the Federal government [read taxpayers]. the decision was, in the opinion of the Treasury, “necessary for preserving the continued strength and stability of the mortgage market.” Now, and through the end of 2012, the Federal government [again, that's you and me] are guaranteed to cover all losses of the two companies. You can see more of the details in this Wall Street Journal article.
What does that mean for you and me? In the short run, this will probably help hold mortgage rates down. With unlimited reserves, Fannie and Freddie will almost certainly be more aggressive in buying mortgages. This increased demand will encourage lenders to increase the supply of mortgages, which they do by either lowering rates [to encourage more good borrowers back into the market], or loosening standards [to attract more borrowers from the edges]. This is good news for borrowers, especially people looking to take advantage of the extended and expanded first-time home buyers credit.
The long run, however, is more concerning. To get access to all this new capital, Fannie and Freddie had to give the government preferred stock paying 10% dividends [preferred means the dividends are guarenteed no matter what]. They each also gave the government warrants that allow the government to purchase roughly 80% of each company. So, in effect, the Federal government owns Fannie Mae and Freddie Mac. And the Feds track record for running anything isn’t too great.
Hopefully we will have the best of both worlds — a well capitalized secondary mortgage market and a Federal government dedicated to allowing Fannie and Freddie to operate as somewhat independent entities. We will certainly see what happens over the next few months.
Tags: Fannie Mae, Freddie Mac, mortgage news
