In a move to reassure investors as it makes long-term plans for Fannie Mae and Freddie Mac, the Obama administration says it’s prepared to step in and buy as much preferred stock in the companies as necessary to offset reductions in their net worth over the next three years.
Since the mortgage guarantors were placed in government conservatorship in September 2008, the Treasury Department has helped prop the companies up by purchasing $60 billion in Fannie Mae preferred stock and investing $51 billion in Freddie Mac.
Although that’s well short of the $200 billion per institution limit established at the time, it’s expected that Fannie and Freddie’s losses will continue to mount as unemployed and underwater borrowers stop making their mortgage payments.
The decision to allow the cap to increase enough to cover "any cumulative reduction in net worth over the next three years" should "leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis," the Obama administration said in a press release.
The announcement — made on Christmas Eve — comes as the administration prepares to release a report in February detailing its view of what the government’s long-term role in the housing market should be. The report, expected around the same time the administration releases its budget for fiscal year 2011, will include recommendations on the future of Fannie and Freddie.
In June, the administration introduced its proposal to overhaul the financial regulatory system, highlighting options for Fannie, Freddie and the Federal Home Loan Bank system, collectively known as the government-sponsored entities, or GSEs (see story):
- Return them to their previous status as privately owned, government-chartered companies.
- Wind down Fannie and Freddie’s operations and liquidate their assets.
- Incorporate the GSEs functions into a federal agency like Ginnie Mae, which operates under the Department of Housing and Urban Development.
- Operate Fannie and Freddie on a public utility model, with the government regulating their profit margins.
- Convert the GSEs into companies that provide insurance for covered bonds.
- Break Fannie and Freddie up into many smaller companies.
The Obama administration also said Thursday that it intends to wrap up $220 billion in purchases of mortgage-backed securities guaranteed by Fannie and Freddie at the end of the year. Those purchases — along with a similar $1.25 trillion Federal Reserve program scheduled to wind down by the end of March — are credited with keeping interest rates at historic lows in 2009.
Recent tightening of underwriting standards by Fannie, Freddie and the Federal Housing Administration (FHA) demonstrate the Obama administration’s commitment to making a transition to "an environment where the private market is able to provide a larger source of mortgage finance," the press release stated.
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