Obama Administration Gives Fannie Mae And Freddie Mac Blank Check – Part II

The Obama Administration’s move on Christmas Eve to extend the borrowing power of Fannie Mae and Freddie Mac has gone largely unnoticed in the holiday aftermath as concerns about recent terrorist attempts and commercial airplane security dominated the airwaves. But with a sluggish economy that has yet to begin expanding again, and a secondary mortgage market struggling to maintain liquidity, this action by the White House could have far reaching consequences in 2010.   

What questions should we be asking?

Between Fannie Mae and Freddie Mac, the agencies have deployed approximately 111 billion of the 400 billion set aside originally as mortgage market bailout funds, but their combined efforts, while easing market liquidity concerns, have done little to assuage the crippling effects of a stagnant real estate market where property values have plummeted.

Yesterday, we took a look at the origins of Fannie Mae and Freddie Mac and broadly described how big a role they play in the residential mortgage markets. Today, we will take a look at an excerpt from the actual announcement by the Treasury Department on December 24 in order to assess the possible avenues the White House intends to pursue in the coming months to combat the mortgage crisis.

At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury’s funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.

Treasury Department Press Release — December 24, 2009

Some market experts and economists predicted last year that 400 billion dollars in bailout funds for Fannie Mae and Freddie Mac would not be enough. Last week’s amendment by Treasury seems to confirm what many outside of government have long suspected – that there will be no quick or inexpensive solution to the nation’s mortgage woes.  

One of the areas in which the Obama administration has not been able to make much progress during the current mortgage crisis has been convincing mortgage lenders to aggressively offer some sort of financial relief for their borrowers who are in danger of default. A mass reduction in the value of mortgage liens would adversely impact the balance sheets of the nation’s major banks, especially those like Wells Fargo, BankAmerica and Citibank, companies who hold a substantial amount of their assets in the form of residential mortgage loans.

Could the Christmas Eve action by the White House be a precursor of a more ambitious loan modification program that reduces principal balances closer to actual market values in the nation’s hardest hit markets? A significant decrease in mortgage payments for a large number of borrowers might cause investors, both foreign and domestic, to lessen the amount of U.S. mortgage paper in their portfolios.

Will the president and his advisors consider buying a considerable amount of loans in danger of default in order to reduce borrower’s monthly payments? Given the short history of the Obama administration, it is unlikely, but not impossible, that this maneuver will result in any dramatic rescue effort for individual homeowners who are financially strapped.

The Treasury Department plans to issue a preliminary report around the time the Obama administration’s budget is released in early February. Until then, the marketplace will continue to speculate on the direction the White House intends to take with the enormous expansion of buying power now vested in Fannie Mae and Freddie Mac.