WASHINGTON – The federal government on Sunday moved again to shore up the troubled mortgage market by taking over Fannie Mae and Freddie Mac, the two key players in the secondary mortgage market.
Yesterday's rescue bid for Fannie and Freddie comes as new data shows the delinquency rate for home loans hit a new high last quarter of 6.41%, and the foreclosure rate hit a three-decade high of 1.19%, promising continued turmoil for the mortgage market in the coming months.
As part of the unprecedented conservatorship of the two government sponsored enterprises, top management was removed. Herb Allison, a long-time Wall Street executive and former vice chairman of Merrill Lynch, was named temporary head of Fannie Mae, and David Moffett, former vice chairman of US Bancorp., as head of Freddie Mac. Daniel Mudd, the CEO of Fannie, and Richard Syron, the head of Freddie, have agreed to stay on and assist the conservators with the transition. Mudd is expected to cancel his annual address to NAFCU’s Congressional Caucus, scheduled for next week.
The government takeover was precipitated by the growing skittishness among foreign investors to buy debt in Fannie or Freddie, which funds the vast secondary market. As part of the conservatorship, the U.S. Treasury will guarantee that debt, which includes more than $60 billion in so-called agency bonds held by credit unions.
The two companies, little understood by the public, play a critical role in the mortgage market by buying more than half of the residential mortgages originated by banks and credit unions. The mortgages then either are repackaged and sold to investors as mortgage backed securities or held in portfolio by one of the two. Credit unions hold as much as $20 billion of the mortgage backed securities issued by Fannie or Freddie.
As part of the rescue bid, the Treasury Department will intervene in the mortgage backed securities market by managing purchases and sales for the huge MBS portfolios held by Fannie and Freddie.
The government takeover was precipitated by increased concerns that growing losses at Fannie and Freddie have left them undercapitalized, prompting foreign investors to shun the once-popular debt. Fannie and Freddie have reported more than $11 billion in losses over the past year while the mortgage market has crashed, and are expected to report more losses for the third quarter. Under the conservatorship, the federal government initially will infuse $1 billion into each company, with the possibility of as much as $100 billion being invested.
Credit union leaders yesterday acknowledged the importance of the two companies to the industry and expressed their support for the federal takeover.
Geoff Bacino, a member of the Federal Housing Finance Board, which oversees another government sponsored housing enterprise, the Federal Home Loan Banks, said by guaranteeing the Fannie and Freddie debt the conservatorship will help hold the value for the billions of dollars in (Fannie and Freddie) agency bonds held by credit unions. The government rescue, he said, also should increase the ability of the two strapped companies to buy more mortgages. “For the last two weeks Freddie was actually selling more mortgages than it was buying,” Bacino, also a former NCUA Board member, told The Credit Union Journal yesterday.
NAFCU, which has a mortgage affinity program with Fannie, noted the importance of both companies to credit unions. “We believe it is imperative that Fannie Mae and Freddie Mac have access to the capital they need to sustain the U.S. mortgage market at this time of uncertainty in the financial markets,” said NAFCU President Fred Becker.
CUNA President Dan Mica said he hopes the government takeover will help stabilize the mortgage markets. "From what we have seen, it appears this plan will lower mortgage rates from what they otherwise would have been, and will lessen the impact of the credit crunch on the housing market," said Mica.
The government takeover was made possible a month ago when the Treasury Department convinced Congress to pass enabling legislation. The legislation allows the government to infuse capital in the two and to buy stock to help shore them up. The legislation set up a new regulator for the two mortgage giants, the Federal Housing Finance Agency, which will run them under conservatorship.
While Congress has debated reform of Fannie and Freddie oversight for years, the rapid onset of the troubles with the two companies helped push the legislation through Congress quickly.
