September 8th, 2008 9:25 PM by Lehel Szucs
This weekend, the U.S. Dept. of the Treasury placed Fannie Mae and Freddie Mac, government sponsored enterprises (GSEs), into a conservatorship. The federal government is authorized to take up to an 80 percent stake in the companies, and, as part of its duties under the conservatorship, will review both Fannie’s and Freddie’s financial condition quarterly, as well as inject money into the operations as needed.
Under the conservatorship, both GSEs will be allowed to increase their mortgage funding over the next year and a half, then, beginning in 2010, the plan calls for a reduction in their portfolios of 10 per cent a year until they have been reduced to $250 billion. As part of this weekend’s action, both CEOs were relieved of their duties and Herbert Allison, former Merrill Lynch vice chairman, and David Moffett, former U.S. Bancorp CFO, were selected to lead Fannie Mae and Freddie Mac, respectively.
In light of the U.S. Dept. of the Treasury’s action, C.A.R. today reaffirmed its support for Fannie Mae and Freddie Mac and their countercyclical roles.
While the short-term impact of the Treasury’s actions over the weekend served to calm the markets and restore confidence, in the longer term these entities need to be able to fulfill their historic mission. A privatized Fannie and Freddie will short-circuit the countercyclical role the GSEs have played during precarious times in real estate markets.
Without an institutionalized mortgage-backed securities market, mortgage capital eventually will be less predictable and more expensive, and adjustable-rate mortgages could become the standard loan for home buyers, as could higher down payment requirements. The 30-year, fixed-rate mortgage as we know it will no longer be readily available for most home buyers and may effectively disappear. The result could be a dramatic decline in homeownership rates in California and across the nation.
C.A.R. is concerned that the Treasury, and Fannie Mae’s and Freddie Mac’s new CEOs, will overreact and change the mission and role of the GSEs. Wall Street and investors are understandably reluctant to buy mortgage backed securities (MBS) that are not either originated from or guaranteed by Fannie or Freddie.
The GSEs hold or have securitized nearly half -- roughly $5 trillion -- of all mortgages in the U.S., and in the current environment with private lender constraints, they account for the vast majority of all new mortgages in California.
We have just recently begun to see an increase in home sales, currently at nearly 490,000 units on an annualized basis, up from 284,000 in the fourth quarter of last year. The most significant, reliable source of home loans in California today are financed by either Fannie Mae or Freddie Mac. California’s and the nation’s housing markets simply cannot withstand the financial rug being pulled out from beneath them. Additionally, the repercussions this could have on the already weak economy could be devastating.
C.A.R. is urging lawmakers to support continued government involvement in supporting the institutional secondary market and its role in creating homeownership opportunities. While we applaud the U.S. Dept. of the Treasury for increasing the GSEs portfolio limits, we will be asking Congress to enact legislation to ensure the two companies continue to fulfill their mission.