WASHINGTON-The Bush administration made clear what had been implied in recent weeks, that debt issued by either Fannie Mae or Freddie Mac is now explicitly guaranteed by the federal government.
Or did it?
The companies were taken over by the government in September and were given a guaranteed credit line with the Treasury, which amounts to a federal guarantee of their debt, Federal Housing Finance Agency Director James Lockhart told Congress. The Federal Housing Finance Agency is the new regulator that oversees Fannie and Freddie. The conservatorship and the access to credit by the U.S. Treasury "provide an explicit guarantee to existing and future debtholders of Fannie Mae and Freddie Mac," said Lockhart, during testimony before the Senate Banking Committee.
The announcement is important for credit unions, which hold some $50 billion worth of bonds issued by one of the two secondary mortgage market giants.
Spreads have widened for the GSEs and many other issuers of securities. As confidence returns and investors understand the strength of the Treasury agreements, we would expect that to narrow," said Lockhart.
But hours after Lockhart's testimony a spokesman for the Treasury issued a statement muddying the waters even more, suggesting that some debt instruments will be government guaranteed. The markets have generally been treating Fannie and Freddie debt as if it was government guaranteed since the two companies were taken over.
Lockhart said that he and the Treasury Department have urged the two so-called government-sponsored enterprises to add liquidity to mortgage markets by purchasing assets and by expanding their portfolio of home loan investments.
But Lockhart said that Fannie Mae and Freddie Mac should not buy toxic mortgages, those held by credit unions and banks that are diminished in value.
