Fannie Mae and Freddie Mac would take on a much larger role under the housing plan President Obama outlined Wednesday, pushing into the future any attempts to privatize or liquidate them, observers said.
As part of the plan, the Treasury Department would double its funding commitment for the two government-sponsored enterprises, to $200 billion each. The plan also calls for helping 4 million to 5 million underwater borrowers refinance loans that Fannie and Freddie already own or guarantee. It would do so by removing a long-standing requirement that the GSEs get credit enhancement for any loans they buy or guarantee that are worth more than 80% of the home's value.
The GSEs now "are front and center," said John Courson, the president of the Mortgage Bankers Association. "What it does to their future and coming out of conservatorship, only time will tell. But the refinancing portion and loan modification plan are activities they are going to be committed to for years."
Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc., called the plan "proof that receivership is off the table" in a report issued Wednesday. The administration "is taking conservatorship and converting it into quasi-nationalization."
If the increased funding commitment "isn't sufficient to keep the GSEs from negative net worth — and we think it's an ample cushion — the Obama administration will just dig down some more and commit still more billions to Fannie and Freddie," the report said.
Robert Litan, a senior fellow at the Brookings Institution and a vice president for research and policy at the Kauffman Foundation, said the Obama administration was "smart" to use its authority under previous legislation to double its funding commitment to the GSEs without dipping into Troubled Asset Relief Program funds.
"They're making lemonade out of lemons," Mr. Litan said. "They can use Fannie and Freddie money to slow the housing price decline, which will help the banks, and toxic securities will be worth more."
Mark Fleming, the chief economist at First American CoreLogic Inc., called loosening the GSEs' refinancing requirements "a combination of foreclosure prevention and fiscal stimulus because it puts cash back in people's pockets." The plan "would potentially put some floor under housing prices and indirectly slow the pace of borrowers with negative equity."
Michael Chang, an interest rate strategist at Credit Suisse Group Inc., said the news that the government had increased its backstops caused spreads — the difference in yield between the GSEs' debt costs and benchmark rates — to tighten by several basis points.
The long-term fates of the GSEs are still a matter of uncertainty in the markets for their debt and mortgage bonds, Mr. Chang said. "There's no clear picture of what form the agencies will have once they come out of conservatorship," but the Obama plan suggests they will be in conservatorship longer than originally anticipated. "Over the near term, the government is going to provide the backstop."
However, Laurie Goodman, senior managing director at Amherst Holdings LLC's Amherst Securities Group LP, said what is needed to cement market confidence "is a statement that the securities are totally guaranteed with the full faith and credit" of the government.
"I don't think increasing the backstop builds that much confidence in and of itself," she said. "The foreign investor participation in this market has gone way down."
Arthur Frank, the director of MBS research at Deutsche Bank Securities Inc., said domestic investors already had a relatively strong level of comfort with the government's commitment, but he agreed that foreign investors have more reservations.
While traveling, he found that Asian investors are "looking for a long-term government plan post-conservatorship," Mr. Frank said. "They were restricting their additions to GSE risk until they had clarification there."
