Treasury Expands Support for Fannie, Freddie

By:
Kirk Haverkamp - MortgageLoan.com

The U.S. Treasury Department will provide nearly unlimited support for Fannie Mae and Freddie Mac over the next three years to ensure the viability of the two major mortgage financiers.

Treasury said it will increase the current assistance limit of $200 billion per company “as necessary” to ensure the survival of the two government-supported lenders. The move comes even though neither company has come close to exhausting their current limits, with Freddie Mac receiving $51 billion in support and Fannie Mae $60 billion through the third quarter of 2009.
 
The news sent stock prices of both companies up by more than 20 percent in Monday morning trading, with Freddie Mac hitting $1.58 a share and Fannie Mae reaching $1.29. The two secondary lenders were taken over by the Treasury Department in September 2008 to prevent their collapse as mortgage defaults soared during the collapse of the subprime mortgage market.
 
Treasury said it is also changing the guidelines for reducing the size of the two companies’ mortgage portfolios, to give them added flexibility to reach their targets. Instead of requiring the companies to reduce their actual portfolios by 10 percent a year, the maximum portfolio size, currently $900 billion, will be reduced b 10 percent annually.
 
In addition, the Treasury Department said it is ending several other assistance programs at the end of the year. A program to purchase mortgage-backed securities issued by the two lenders will conclude as of Dec. 31, 2009, as will a short-term credit facility established for Fannie Mae, Freddie Mac and the Federal Home Loans Banks as a source of backup liquidity.
 
Both programs were established under the Housing and Economic Recovery Act (HERA) of 2008. Approximately $220 billion in mortgage-backed securities were bought under the first program; the short-term credit facility was never tapped.
 
Fannie Mae and Freddie Mac are classified as Government-Supported Enterprises (GSEs). Both were established by the federal government to provide liquidity to the mortgage market by purchasing and reselling mortgages made by primary lenders, thereby providing fresh capital for new loans. Both were later converted into private enterprises, but were taken over again by the government in 2008 when their collapse appeared imminent.

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