More money for Fannie and Freddie
If you’re like me and most other people, you weren’t paying too much attention to what the United States Treasury Department was doing on Christmas Eve. After all, we had eggnog to drink, gifts to open and fattening foods to consume. But instead of being home with their loved ones on Christmas Eve and partaking of all the goodies, the Treasury Department was giving away goodies of a different kind.
On Dec. 31, 2009, the department announced it was removing the caps that limited the amount of available capital to Fannie Mae and Freddie Mac for a period of three years. In September 2008, when the federal government seized control of the two agencies under a legal process called conservatorship, a $200 billion cap per agency was put into effect.
With the cap removed, the cost of keeping Fannie and Freddie afloat is unlimited and unknown. In exchange for the additional funding, the Treasury has received preferred stock in the companies paying 10 percent dividends in addition to warrants to acquire nearly 80 percent of the common shares in each firm.
The department’s decision to take this action, which did not require congressional approval, was to preserve and continue to strengthen the stability of the mortgage market. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have accumulated huge losses stemming from real estate defaults.
The further funding could result in putting more pressure on the two agencies to help troubled homeowners avoid foreclosure. This additional step could help keep mortgage rates low, as well as assisting struggling banks by keeping foreclosures off their books. However, the increased cost to the American taxpayer to get us out of the housing crisis is going to be even more than originally expected.
Just to add a little more salt to the taxpayers' wounds, it was also announced on Dec. 31 that the chief executive officers of both agencies’ compensation will be as much as $6 million a year, including bonuses. A nice Christmas present for them, but it could be a little hard for the American people to accept in the face of 10 percent unemployment.
Since Fannie Mae and Freddie Mac are in this deplorable financial position partly because of government pressure going back to the 1990s, I guess the government should accept the responsibility of bailing them out. At that time the agencies were encouraged to make subprime loans to low income buyers by both the government and Fannie and Freddie’s stockholders. By promoting these risky loans Fannie and Freddie made a lot of people rich, not the least of which were their executives.
But, unfortunately, the subprime borrowers who were placed in homes they could never afford eventually defaulted. This combined with a general economic downturn and high unemployment almost brought down the mortgage giants.
Was it fair to sneak in another bailout on Christmas Eve when no one was watching? Probably not, but if it succeeds in keeping mortgage rates low, stabilizing the marketplace and attracting more buyers, then maybe the American taxpayer will overlook it. After all, didn’t we have even bigger problems to worry about on Christmas Day, like a plane almost exploding over Michigan? It’s all relative.