Fannie Mae and Freddie Mac have under gone some changes since the government placed the mortgage entities into conservatorship, the most recent change has been a rather dramatic drop in mortgage rates.
Once it became clear that the housing credit crisis was going to impact Fannie and Freddie’s ability to raise more capital and to continue the machine of mortgage guarantees and purchases, the federal government stepped in to guarantee the debts of these companies and place them in government conservatorship. Fannie Mae and Freddie Mac were established to provide liquidity to the mortgage market by setting uniforms standards in which they would provide a guarantee on home loans and by buying mortgages from banks and other lenders to generate more cash for those lenders to make more home loans. Fannie Mae and Freddie Mac together hold or guarantee over $5.0 trillion of mortgages.
The government engaged in this undertaking to avoid further damage in the mortgage and housing markets by assuring there would be some minimal level of capital available and these firms would continue to provide liquidity to the market. It was the actions of the Treasury and the Federal Housing Finance Agency that placed Fannie Mae and Freddie Mac into receivership.
Fannie and Freddie have continued to operate as normal, with the exception of some senior employees that were let go. The entities still buy mortgages from lenders and securitizing them for sale or hold in their own portfolios. They companies have been able to raise money in the marketplace through bond offerings that now have a more stable and lower interest rate due to the government backing. The actions by the Treasury did in fact help stabilize the mortgage market and prevented rates from drifting measurably higher. The housing market has most likely benefited, but with the drop in prices it hard for most individuals to ascertain the value of any benefit in housings. The government injection should eventually benefit the value of housing, other financial institutions that gain by stable prices in mortgage backed securities and the overall U.S. economy.
Along with the purchase of some senior preferred stock combined with some warrants, the Treasury department also created a credit facility for short term lending to the two mortgage entities. The Treasury just started the process of purchasing new mortgage backed securities for additional liquidity and to help push mortgage rates lower.
An unintended consequence of the government actions was the significant loss in value of Fannie and Freddie preferred stock. Some banks had or do hold fairly sizeable amounts of Fannie and Freddie preferred stock. The preferred and common stocks of these companies still trade but they have lost most of their value. The need for the banks to acknowledge the loss in value has caused some small and some midsize banks holding the securities to have compliance problems due to this loss that impacts their regulatory capital requirements. Federal banking regulators have noted the issue and planned to develop a strategy to help those banks impacted by the loss of capital. Assumedly, the considerable extension of TARP funds to the smaller, regional banks was pushed along by the losses incurred in Fannie and Freddie stock, see article listing TARP recipients at www.selectcdrates.com.
Though the process will ultimately have costs for the tax payer, the economy and mortgage market should continue to benefit. Existing mortgages will show little change or impact form the actions regarding servicing or loan payments but new home buyers and existing homeowners who refinance may reap some gain from the additional funding and government backing to the extent that the conditions for obtaining a mortgage loans and the interest rates on these loans would most likely be far harsher if these actions had not been taken.
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