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January 4th, 2010

Update1: U.S. Says “Merry Christmas” to Fannie, Freddie

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UPDATE1: When the U.S. pledged its unwavering financial support to Fannie Mae and Freddie Mac on Christmas Eve 2009, the decision brought to light one simple fact: The losses Fannie and Freddie have sustained and will sustain in the near future, will likely cost us more than $400 million (the sum the two were previously promised to cover losses). One former general counsel at the Treasury Department seems to agree 100%:

Taxpayer losses from supporting Fannie Mae and Freddie Mac will top $400 billion, according to a former general counsel at the Treasury who is now a fellow at the American Enterprise Institute.

“The situation is they are losing gobs of money, up to $400 billion in mortgages,” Wallison said in a Bloomberg Television interview. The Treasury Department recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two government-sponsored enterprises, he said.

Original post (published on 12/28/09): On Christmas Eve, President Obama announced that the U.S. will “cover an unlimited amount of losses” accrued at Fannie Mae and Freddie Mac through 2012, writes the Wall Street Journal. The president’s announcement lifts the $200 billion cap on financial support that the country previously extended to each company.

The announcement, along with its clever timing, was met with strong controversy:

“The timing of this executive order giving Fannie and Freddie a blank check is no coincidence,” said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed “to prevent the general public from taking note.”

Treasury officials couldn’t be reached for comment Friday. [It was Christmas!]

Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government’s role in the companies.

So why did Washington do it? According to the Treasury, the unlimited coverage will continue to foster “strength and stability” in the mortgage market. Some analysts agree, saying it’s an assurance to the markets.

Besides that, the unlimited coverage allows the U.S. to take even more control over the mortgage giants:

In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.

Double Standard?

Last Thursday, Fannie and Freddie released pay packages which outlined the compensation plans for their executives. Their regulator, the Federal Housing Finance Agency (FHFA), defends that executive compensation — of up to $6 million for one exec — is down 40% since the GSEs entered into conservatorship in 2008.

While Fannie and Freddie’s executive salary packages may be less than some Wall Street firms, the FHFA’s reason for issuing the multi-million dollar paychecks is the same as Wall Street’s: to “attract and retain the talent needed.” Can Washington continue to criticize executive compensation when they’ve approved large salaries and incentives for the executives at the companies they control?

With unemployment near 10%, “to be handing out $6 million bonuses to essentially federal employees is unconscionable,” said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.

Maintaining Order or Control?

As Washington’s influence over the big banks withers every time a TARP recipient pays back their loan, and as the confusion mounts to what the fate of Fannie and Freddie will be come 2010, the Christmas Eve announcement makes us question whether this decision was made based on maintaining order in the shaky markets, or controlling them? To us, it seems to have cemented Fannie and Freddie as Washington’s tool to further implement mortgage programs and control the landscape of the mortgage market moving forward.

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One Response to “Update1: U.S. Says “Merry Christmas” to Fannie, Freddie”

  1. realestatewonk (Jamie Smith Hopkins) Says: December 28th, 2009 at 6:54 pm

    RT @HSHassociates: US Says “Merry Christmas” to Fannie, Freddie http://bit.ly/67rlcA Offers unlimited support for losses at F&F – $200 b …

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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