FANNIE AND FREDDIE TAKE OVER!

FANNIE & FREDDIE

Treasury Secretary Henry Paulson announced that the federal government had taken over Freddie Mac and Fannie Mae. The long term effects of the overall housing market are up in the air, but here is what is known regarding this plan so far. There may be some positive effects to interest rates from this take over.

FANNIE & FREDDIE TAKE OVER
The two mortgage giants are now operating in a government conservatorship that will be administered by the new Federal Housing Finance Agency (created under the same Congressional authority that authorized the Treasury Department to shore up Freddie and Fannie. James Lockhart, former director of the Office of Federal Housing Enterprise Oversight which had responsibility for the two government sponsored entities (GSEs) is the new director of the Finance Agency.
The Conservator will control and direct the operation of the Company and will have all the powers formerly held by the shareholders, directors, and the officers of the Company and conduct all business, collect all money due to the company, preserve the assets and property of the company, and contract for any assistance necessary.
In return for providing funds to guarantee their debt the Treasury Department will immediately receive $2 billion in preferred stock that will pay a 10 percent dividend. $1 billion of the stock will come from each of the two companies and the Conservatorship will purchase additional stock, perhaps as much as $100 billion worth, if the GSE's capital reserves fall below an agreed upon level. This preferred stock will take president over any claims by holders of common or the existing preferred stock.
According to Secretary Paulson, the GSEs will modestly increase their mortgage backed securities portfolios through the end of next year "through prudent mortgage purchases" and will then reduce those holdings by 10 percent per year after 2009. The portfolios shall not exceed $850 billion for each company. An Associated Press article quoted Mark Zandi, chief economist for Moody's Economy.com, as saying this will effectively make the federal government the nation's mortgage lender.
It appears that Treasury is primarily interested in protecting holders of GSE debt. This class of creditors includes many large investment companies and a number of foreign governments.
The Treasury Department is establishing a new secured lending credit facility which will be available to the two GSEs and to Federal Home Loan banks.
Both CEOs - Fannie's Daniel Mudd and Freddie's Richard Syron - have lost their executive positions and mammoth salaries although it appears that each has agreed to stay on to assist in an orderly transition.
The conservatorship is open-ended in terms of time. The conservator alone will make the determination that the companies have returned to a safe and solvent condition.
MORTGAGE RATES HEADING LOWER? While it is yet to be determined the full extent that this take over will have on the housing market. This latest move from the government should help borrowers looking to refinance or purchase a home, as interest rates on conventional loans will decrease.
The final numbers of how much this will affect interest rates is up in the air, but the average rate on a 30 year fixed loan will decrease from the national average of almost 6.5%, where rates stood when this action was taken.The government bailout is aimed at making mortgages easier to obtain and afford.

By shoring up the mortgage financing giants, they can continue buying mortgages from lenders and injecting much-needed cash into the system.
"Fannie Mae and Freddie Mac are crucial to turning the corner on housing," said Treasury Henry Paulson. "Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance. Our economy and our markets will not recover until the bulk of this housing correction is behind us."
However, the news is not all good. As foreclosures and delinquencies are at all-time highs, Fannie and Freddie are expected to maintain - if not ratchet up - tighter lending standards. And the fees they have introduced for borrowers with weaker credit histories won't go away anytime soon.
When looking at mortgage rates that borrowers pay we must realize that they are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie.
Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors are still demanding rates of 2.25% to 2.45% above Treasuries. Historically, the spread has been 1.25%.
With the government now taking over the companies and minimizing the risk associated with their debt, investors may be willing to ease off their need for higher rates.
DON'T WAIT - THINGS COULD CHANGE AGAIN As with many recent plans unveiled by the government, there is no telling where the mortgage and housing market will move in the near future. If more negative news were to come to pass then the drop in interest rates could be a short term event. Therefore, if you were waiting for lower interest rates, now is the time to act. As these lower interest rates could potentially only be a short term reality.

Information obtained courtesy of Bill Kamboukos and Carlos Felix of Strategic Mortgage