Will Fannie, Freddie Take Part in $700B Rescue?
Friday, October 10, 2008
Mortgage lending giants Fannie Mae and Freddie Mac would qualify to sell bad mortgage assets to the federal government under the Emergency Economic Stabilization Act of 2008 (EESA), signed into law last Friday. But according to James B. Lockhart, director of the Federal Housing Finance Agency (FHFA), which was named conservator when the government took control of the two companies on September 7, a decision to participate in lawmakers' $700 billion rescue plan has not yet been reached.
Lockhart told C-SPAN during an interview Sunday that only two to four percent of Fannie and Freddie's $5.4 trillion in outstanding debt are bad mortgages. According to Lockhart, perhaps the two entities' strongest role in the current financial crisis is to continue their mission of buying up banks' new mortgages to foster the free flow of credit once the Treasury's plan has enabled institutions to resume lending. According to a Reuters report, the first asset sale under the Treasury program is not expected to take place for at least four weeks.
In the months to come, lawmakers and the next Administration will still need to determine the structure of Fannie and Freddie – will they continue as publicly traded government-backed enterprises or move more toward privatization?
Regarding the future of the two mortgage financiers, Lockhart told C-SPAN, “There is no doubt about it, it has to be re-looked at. My view is they should be able to come out of this situation with new investors and a much stronger capital structure.”
“Certainly we would hope that over the next year, two years, they [Fannie, Freddie] would return to profitability, which also would be a major step forward,” Lockhart continued.
Also in an effort to help kick-start the credit market, both Fannie and Freddie announced last week that they had canceled planned increases to banks' adverse market delivery fees, in hopes that the savings would trickle down to borrowers.
In related news, the International Swaps and Derivatives Association and the credit derivatives market are hoping to set the price tag for reconciling up to $500 billion in bad derivative deals connected to Fannie Mae and Freddie Mac. The payout amounts that fall to insurers and banks who offered credit default swaps (CDS), or insurance against debt default, on the two enterprises will be determined today in one of the biggest financial auctions ever. The final recovery rate is estimated between 85 and 92 cents on the dollar, but analysts caution that there is potential for a much lower value.
Lockhart told C-SPAN during an interview Sunday that only two to four percent of Fannie and Freddie's $5.4 trillion in outstanding debt are bad mortgages. According to Lockhart, perhaps the two entities' strongest role in the current financial crisis is to continue their mission of buying up banks' new mortgages to foster the free flow of credit once the Treasury's plan has enabled institutions to resume lending. According to a Reuters report, the first asset sale under the Treasury program is not expected to take place for at least four weeks.
In the months to come, lawmakers and the next Administration will still need to determine the structure of Fannie and Freddie – will they continue as publicly traded government-backed enterprises or move more toward privatization?
Regarding the future of the two mortgage financiers, Lockhart told C-SPAN, “There is no doubt about it, it has to be re-looked at. My view is they should be able to come out of this situation with new investors and a much stronger capital structure.”
“Certainly we would hope that over the next year, two years, they [Fannie, Freddie] would return to profitability, which also would be a major step forward,” Lockhart continued.
Also in an effort to help kick-start the credit market, both Fannie and Freddie announced last week that they had canceled planned increases to banks' adverse market delivery fees, in hopes that the savings would trickle down to borrowers.
In related news, the International Swaps and Derivatives Association and the credit derivatives market are hoping to set the price tag for reconciling up to $500 billion in bad derivative deals connected to Fannie Mae and Freddie Mac. The payout amounts that fall to insurers and banks who offered credit default swaps (CDS), or insurance against debt default, on the two enterprises will be determined today in one of the biggest financial auctions ever. The final recovery rate is estimated between 85 and 92 cents on the dollar, but analysts caution that there is potential for a much lower value.
