The federal government executed a sweeping takeover of mortgage giants Fannie Mae and Freddie Mac on Sunday in a move aimed at expanding the pool of money available for home finance. The basic elements of the aggressive plan start taking effect immediately, but longer-term measures -- especially provisions to grow, then shrink the firms -- are likely to be targets of contention for months to come.
"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil . . . at home and around the globe," Treasury Secretary Henry M. Paulson said in announcing the government's actions."A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation," he said.
The first phase of the government's plan came Sunday as it seized control of the firms and ousted their chief executives, placing the companies under the indefinite management of their regulator, the Federal Housing Finance Agency.
The plan also calls for buying as much as $200 billion of special stock in the firms soon, standing ready to fund an expansion over the next 15 months and then shrinking operations over a number of years to wean the nation from its dependence on the massive financial might of the combined operations.
Fannie and Freddie already own or guarantee $5.4 trillion in mortgages, or about half the total outstanding. In the second quarter, the companies backed 84% of all new home loans made, according to industry research firm Inside Mortgage Finance. A separate government agency, the Federal Housing Administration, insures many of the rest.
But even as government officials moved to take control of the troubled firms, it was clear they still faced challenges and a delicate balancing game. They must satisfy enough investors to ensure that the companies' bonds and mortgage-backed securities are considered safe bets. At the same time, they must avoid seeming to risk billions of tax dollars to bail out the firms' investors.
In perhaps the most unexpected aspect of its rescue effort, the government said that the Treasury would start buying up an undetermined quantity of the mortgage-backed securities issued by the troubled firms. And it will even permit Fannie and Freddie to temporarily ratchet up their own buying of such securities in an effort to expand the funds available for mortgages and drive down the interest rates that home buyers must pay.
Despite dramatic rate cuts by the Federal Reserve over the last year, the rate for a standard 30-year fixed-rate mortgage has remained stubbornly above 6%.
Paulson and James B. Lockhart, director of the Federal Housing Finance Agency, would not say what spurred the government to act now.
In conclusion, we wait and see how things shake themselves out. It's a bold move that may well payoff.
About Bradley E. Arnowitz, P.A. & Associates
Bradley E. Arnowitz P.A. & Associates of Re/Max Beach Properties http://www.arnowitzproperties.com/ is a full-service firm providing brokerage, development, sales investment, property management, asset management, and residential services for office, multi-family, industrial/commercial, residential, and retail properties.
Bradley E. Arnowitz P.A. & Associates of Re/Max Beach Properties http://www.arnowitzproperties.com/ is a full-service firm providing brokerage, development, sales investment, property management, asset management, and residential services for office, multi-family, industrial/commercial, residential, and retail properties.
Bradley E. Arnowitz, P.A. has been serving South Florida with Honesty, Integrity, & Results since 2001.
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