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• REAL ESTATE
• DECEMBER 30, 2009

Questions Surround Fannie, Freddie

By NICK TIMIRAOS

The government's move to ease the limits on the securities holdings of Fannie Mae and Freddie Mac has ignited a debate among analysts about what the companies will do with their longer leash.

When the Treasury Department took over Fannie and Freddie last year, one of the requirements they set for the companies required them to begin shrinking their portfolios of mortgages and related investments, which total a combined $1.5 trillion. The idea was to rein in the companies' size and growth.

But last Thursday, the Treasury eased that requirement, meaning the companies won't be forced to sell mortgages next year into an already weak market and could even buy mortgages on the market, which could help hold down interest rates. The Treasury also suspended for the next three years the $400 billion cap on the bailout subsidy that the government will offer. That could give them more flexibility to modify mortgages without worrying about taking losses.

Mahesh Swaminathan, senior mortgage analyst at Credit Suisse, said the firms could use their increased capacity to purchase delinquent loans from pools of mortgage-backed securities that they guarantee. Fannie and Freddie already purchase defaulted loans as they modify them under the administration's loan-modification program, but the additional breathing room means it is now a "slam-dunk for them to speed up" purchases of delinquent loans, Mr. Swaminathan said. New accounting rules that take effect next year also could make it more cost-effective for the companies to buy out bad loans and keep them in their investment portfolios.

The relaxed portfolio limits calmed investor worries that Fannie and Freddie would be forced to sell some of their mortgage holdings just as the Federal Reserve was preparing to wind down its purchases of mortgage-backed securities next spring. The Fed's commitment to buy up to $1.25 trillion has helped to keep mortgage rates near record lows; without that support some economists have said that could rise to 6% by the end of 2010.

"The alternative would have been them selling into that market, which would have been even more difficult for the market to bear," Mr. Swaminathan said. Others said the new flexibility means that Fannie and Freddie could replace the Fed as a big buyer of mortgage-backed securities, especially if weak demand for mortgage-backed securities from private investors drives rates higher.

"It's created a government-purchasing facility other than the Fed," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington.

A Freddie spokesman said the company has used and will continue to use its investment portfolio as "an important tool" to "keep order in the housing and housing-finance markets." A Fannie spokesman declined to comment.

A Treasury official said the more generous portfolio limits were offered to avoid forcing the companies to actively sell their holdings, and they didn't intend for Fannie and Freddie to be active buyers of mortgages. But some analysts said the government wouldn't object to Fannie and Freddie's presence in the market. "You're going to hope that because of their lower cost of capital they will be a bid in the marketplace," said Joshua Rosner, managing director of Graham Fisher & Co.

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Although Fannie's and Freddie's core business is their role guaranteeing payments to mortgage investors, for years they earned additional profits and generated controversy by maintaining a large investment portfolio filled with mortgages and related securities.

The most controversial part of the Christmas Eve announcement was the decision to erase any caps on the amount of Treasury money that the firms can take. That gives the mortgage-finance companies and their government masters a much freer hand to respond to the housing crisis in the year ahead, possibly by moving more aggressively to modify troubled loans.

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Why are Fannie and Freddie not utilizing their balance sheet strength to scrub the mess in fake assets?  They have their hand in the cookie jar! 

Take a close look at the "Government-backed Mortgage-related Security holdings"!!!!

I feel that the most recent provision simply makes it even more open to risky ventures. 

It is in expanding out of their initial charter that Fannie and Freddie developed these mortgage backed securities and fake assets that then got wildly traded...  Now there is nothing yet curbing them from getting into moe such dealings. The Christmas Eve announcement actually makes the situation MORE risky if these institutions remain unbridled.



-- Edited by Sanders on Wednesday 30th of December 2009 10:21:19 AM