Update: FHFA Is New Regulator of F&Fby Tim Manni
Treasury Secretary Henry Paulson announced on Sunday that the US Government will take over struggling mortgage giants Fannie Mae and Freddie Mac. Managerial control of the two mortgage companies will transfer to their new regulator, the Federal Housing Finance Agency (FHFA). As predicted, the companies will enter into a conservatorship, where essentially the structure of the company will remain intact, but top management will change. At Fannie Mae, Herb Allison will replace former company head Daniel Mudd, while Freddie Mac Chief Executive Richard Syron will be replaced by David Moffett.
Despite any dark clouds that have been hanging over Fannie and Freddie, this shake up has at least instilled a new confidence into the market that the two mortgage companies will not fail. The Treasury Department will acquire $1 billion of preferred stock from each company. The government will get the companies’ most profitable stock options in exchange for offering the former Government Sponsored Enterprises a line of credit worth up to $200 billion.
According to the Wall Street Journal, the Treasury Department plans on buying close to $5 billion worth of new mortgage backed securities issued from Fannie and Freddie. That’s good news for the market. The Treasury Department will not begin purchasing mortgage backed securities till month’s end. If Fannie and Freddie are successful in getting things going, it may not be needed at all. Some experts have predicted that mortgage rates could fall as soon as this afternoon. As of this morning, HSH’s fixed rate mortgage indicator (FRMI), an average of 30-year fixed rate mortgages, was 6.62%:
The move is also likely to nudge down mortgage rates for consumers, who are facing the worst housing bust since the 1930s. Despite steep interest-rate cuts by the Federal Reserve, the cost of a typical 30-year fixed-rate mortgage has remained well over 6% for most of the past year. To bolster the mortgage market, Treasury said it will buy, on the open market, at least $5 billion of new mortgage-backed securities issued by Fannie and Freddie.
The government rescue of Fannie and Freddie is likely to leave a trail of billions of dollars in losses for stockholders, including some major banks. But it protects the investments of bondholders, including mutual funds, foreign central banks and government investment funds that own huge amounts of debt issued by the two companies. Investors that have loaded up recently on mortgage-backed bonds — such as Pacific Investment Management Co., the large Newport Beach, Calif., bond manager — could benefit as Treasury purchases of such securities drive up their values.
As feared by many, the government intervention of Fannie Mae and Freddie Mac holds the risk or failure of the mortgage companies over the heads of taxpayers. The government concluded that indeed the two mortgage giants were too big to fail — so they won’t. If these rescue plans don’t work, there’s no place for the housing market to go but down, producing even more losses for tax payers to bear. (Raise a glass) Here’s to hoping the takeover works…
Watch this blog for any new developments as they happen throughout the day.