Astounding move on the part of the US Treasury to announce these changes to the government sponsored entities on Christmas Eve… unfortunately it echoes all the late Sunday night moves made when Tim Geithner was President of the Federal Reserve Bank of New York like the conversion to bank holding companies of Goldman Sachs and Morgan Stanley…
From Bloomberg…
~~~ “Fannie Mae and Freddie Mac, the linchpins of the American housing market, continue to bedevil the U.S. financial system.
In February 2003, their regulator issued a report saying the companies were taking on too much risk by using implicit government backing to plunge deeper into the mortgage market.
The government-sponsored enterprises would pose a systemic threat to the economy in the “remote” chance that either failed, Armando Falcon told the Bond Market Association the same day. The Bush administration, considering his report a potential threat to financial markets, asked him to resign.
Five years later, regulators seized the mortgage-finance companies. Since then, leaders from former Federal Reserve Chairman Alan Greenspan to Warren Buffett have argued the companies can’t be sustained in their dual roles — a for-profit enterprise beholden to shareholders and a tool of housing policy — and should be nationalized or sold.
Nothing has happened. Instead, Fannie Mae and Freddie Mac, which buy home mortgages from banks and package them into bonds sold to investors, have been bailed out with $1.5 trillion in direct and indirect government aid. The Obama administration is banking on the companies to help end a three-year housing slump. The president is delaying plans to lay out a new framework for them in February, and Congress hasn’t scheduled hearings on their future.
‘Giant Pass’
“They’re going to get a giant pass on all of this,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia who is now a bank analyst at FBR Capital Markets in Arlington, Virginia. It’s going to be “three to five years before their fate is determined.”
Rather than beginning to extricate itself from Fannie Mae and Freddie Mac as it is with other bailed-out businesses, the Treasury Department on Christmas Eve removed a $200 billion limit on aid to each of the companies and promised to cover their losses through 2012. Earlier, the Federal Reserve extended a mortgage-bond purchase program by three months, through March.
The approaching withdrawal of Fed support in the form of the mortgage-bond purchases risks “a very, very scary situation,” said Meredith Whitney, founder of Meredith Whitney Advisory Group LLC in New York. Mortgage rates would soar, endangering the economic recovery, if private buyers failed to step in to buy the companies’ debt, she said.
The status of Fannie Mae and Freddie Mac isn’t dealt with in the proposed overhaul of the financial regulatory system that the Senate plans to take up next year. While Treasury Secretary Timothy Geithner said in June that the companies’ future would be discussed in the president’s budget outline in February, the Treasury in its Dec. 24 statement promised only to provide a “preliminary report” by then.
Dual Mandates
Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about $5.5 trillion of the $11.8 trillion in U.S. residential mortgage debt. They have financed as much as 75 percent of new U.S. mortgages this year.
They have been run for more than 40 years as shareholder- owned companies that also have a federally chartered mission to promote the housing market. Those dual mandates have collided and contributed to the companies’ failure, said Federal Deposit Insurance Corp. Chairman Sheila Bair.
“Go one way or the other,” Bair said in an interview this month. “Either completely privatize them and get them completely out or run them as public utilities.” The hybrid structure, with private shareholders, public mandates and federal backstopping, “is classic too big to fail.” ~~~
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” … “It’s created a government-purchasing facility other than the Fed,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington.
A Freddie spokesman said the company has used and will continue to use its investment portfolio as “an important tool” to “keep order in the housing and housing-finance markets.” A Fannie spokesman declined to comment.
A Treasury official said the more generous portfolio limits were offered to avoid forcing the companies to actively sell their holdings, and they didn’t intend for Fannie and Freddie to be active buyers of mortgages. But some analysts said the government wouldn’t object to Fannie and Freddie’s presence in the market. “You’re going to hope that because of their lower cost of capital they will be a bid in the marketplace,” said Joshua Rosner, managing director of Graham Fisher & Co.
Ms. Petrou said that the recent moves “make sense in a short-term way because you avoid market volatility,” but the prospect of limitless aid will make it harder to extricate Fannie and Freddie from the government.
“In a long-term way, it promotes nationalization of U.S. mortgage finance. We have increasingly gigantic, increasingly federal agencies eating up every mortgage out there,” she said.
Although Fannie’s and Freddie’s core business is their role guaranteeing payments to mortgage investors, for years they earned additional profits and generated controversy by maintaining a large investment portfolio filled with mortgages and related securities.
The most controversial part of the Christmas Eve announcement was the decision to erase any caps on the amount of Treasury money that the firms can take. That gives the mortgage-finance companies and their government masters a much freer hand to respond to the housing crisis in the year ahead, possibly by moving more aggressively to modify troubled loans.
Some analysts said the companies now have greater flexibility to pursue more expensive loan modifications, including by writing down loan balances, which would have generated losses, requiring more government cash. But without a bailout ceiling, the administration “needs no longer worry that anything they do would drive Fannie or Freddie over the edge into negative net worth,” said Ms. Petrou.
A Treasury representative said the bailout caps were suspended “specifically to ensure continued confidence in Fannie Mae and Freddie Mac, but were not based on any considerations” related to an expansion of the administration’s loan-modification program.
The Treasury already has handed over about $112 billion to help shore up the companies, which were among the first big financial institutions to fall under government control in the wake of the nation’s mortgage crisis. Fannie and Freddie are playing a crucial role in providing mortgage liquidity. They own or guarantee half of the nation’s $11 trillion in home mortgages and together with the Federal Housing Administration are responsible for backing nearly nine in 10 mortgages.”
http://online.wsj.com/article/SB10001424052748704234304574626630520798314.html
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