Federal Government Stresses Guarantee of Fannie, Freddie Debt
Monday, November 03, 2008
Although the future of the country's largest mortgage financiers, Fannie Mae and Freddie Mac, is questionable, Federal Reserve Chairman Ben Bernanke said on Friday that government backing for the debt issued by the two firms must remain strong. The Treasury Department made a similar declaration last week, stressing that the U.S. government “effectively guarantees” all Fannie Mae and Freddie Mac debt and mortgage-backed securities (MBS), with the ultimate goal that such assurance would effectively reduce mortgage rates.
This “effective” guarantee for Fannie Mae and Freddie Mac rests on the Treasury's capital backstop. A more definitive, explicit guarantee of agency debt, however, would require Congressional approval. Bernanke hinted at the possibility of greater government backing for the two companies last Friday when he spoke by videoconference to a public policy symposium held at the University of California at Berkeley.
“Even if alternative organizational structures are considered for the future, the U.S. government’s strong and effective guarantee of the obligations issued under the current GSE structure must be maintained,” he said.
Reuters.com reported earlier today that analysts from JPMorgan Chase & Co. anticipate the U.S. government might explicitly back a limited amount of Fannie Mae and Freddie Mac unsecured debt to bolster confidence in the housing finance companies.
“We believe there is a possibility that the government could institute a guarantee of agency debt (up to 3 years in maturity, for instance) which would help reassure investors,” the analysts from JPMorgan Chase said in their report.
According to Financial Week, uncertainty about how the federal government might treat debt issued by the two government-sponsored enterprises (GSEs) in the future has depressed investor appetite, keeping U.S. mortgage rates elevated. In addition, diminished support for mortgage debt has elevated Fannie Mae's and Freddie Mac's borrowing costs, making it even more difficult for the two agencies, who own or guarantee nearly half of the nation's $12 trillion in mortgage debt, to bring any form of much needed stability to the housing market.
Both GSEs are seen as key components in ensuring affordable mortgage credit once again becomes available to potential homeowners in the United States. If lenders can sell the loans they make into broader securitized markets, a wide array of funding sources is available to them, and as a result, the cost of mortgage lending is lower. Many see the officials' focus on GSE backing as the next step in their attempt to make mortgages affordable again and credit attainable.
Analysts are saying that Bernanke’s confirmation of government backing for debt the GSEs have issued and are issuing under government control should help calm mortgage markets, Reuters reported.
This “effective” guarantee for Fannie Mae and Freddie Mac rests on the Treasury's capital backstop. A more definitive, explicit guarantee of agency debt, however, would require Congressional approval. Bernanke hinted at the possibility of greater government backing for the two companies last Friday when he spoke by videoconference to a public policy symposium held at the University of California at Berkeley.
“Even if alternative organizational structures are considered for the future, the U.S. government’s strong and effective guarantee of the obligations issued under the current GSE structure must be maintained,” he said.
Reuters.com reported earlier today that analysts from JPMorgan Chase & Co. anticipate the U.S. government might explicitly back a limited amount of Fannie Mae and Freddie Mac unsecured debt to bolster confidence in the housing finance companies.
“We believe there is a possibility that the government could institute a guarantee of agency debt (up to 3 years in maturity, for instance) which would help reassure investors,” the analysts from JPMorgan Chase said in their report.
According to Financial Week, uncertainty about how the federal government might treat debt issued by the two government-sponsored enterprises (GSEs) in the future has depressed investor appetite, keeping U.S. mortgage rates elevated. In addition, diminished support for mortgage debt has elevated Fannie Mae's and Freddie Mac's borrowing costs, making it even more difficult for the two agencies, who own or guarantee nearly half of the nation's $12 trillion in mortgage debt, to bring any form of much needed stability to the housing market.
Both GSEs are seen as key components in ensuring affordable mortgage credit once again becomes available to potential homeowners in the United States. If lenders can sell the loans they make into broader securitized markets, a wide array of funding sources is available to them, and as a result, the cost of mortgage lending is lower. Many see the officials' focus on GSE backing as the next step in their attempt to make mortgages affordable again and credit attainable.
Analysts are saying that Bernanke’s confirmation of government backing for debt the GSEs have issued and are issuing under government control should help calm mortgage markets, Reuters reported.
