ANOTHER CASH INFUSION FOR FANNIE MAE, FREDDIE MAC? With What Consequences?
INCREASING CURRENT $400 BILLION BAILOUT COMMITMENT BEFORE DECEMBER 31ST LIKELY EASIER, FASTER THAN WAITING UNTIL 2010!
When the U.S. Credit Crisis gained steam in September, 2008, it became clear that Giant Mortgage Investors and Guarantors Fannie Mae and Freddie Mac could be in for trouble, as their huge portfolios of troubled residential mortgages began to tumble in value. Mortgage defaults and foreclosures were climbing, and property values trending downward.
As part of the massive Federal Stimulus Program, which shored up major U.S. Banks and Investment Houses, The Fed took control of both previously-semi-autonomous companies, and authorized a cash infusion of as much as $400 Billion to assure their continued viability. So far, according to a Wall Street Journal Report by Nick Timiraos and James R. Haggerty, Fannie and Freddie have taken a collective $112 Billion in U.S Government Stimulus Money.
Although most analysts agree the entities are unlikely to claim the rest of the already-authorized funds, others feel the precautions should be taken by The Fed in case of unexpected housing market turbulence next year. Until the end of the year, the U.S. Treasury Department can increase its financial commitment to Fannie Mae and Freddie Mac without delay. After January 1st, Congress must approve any additional safety-net funding.
What will be done?
The answer is a bit tricky! Many U.S. Taxpayers, leery of the mixed results from Fed Stimulus Efforts thus far, would bristle at a higher cash infusion right now. However, if an emergency bailout of the companies were necessary next year, such action would require Congressional Approval in an election year likely to be contentious.
If Fannie and Freddie were to exhaust reserves, and no increase were approved by Congress, the companies could fail, creating a likely strong ripple through world financial and U.S. Housing Markets. That concern has some close to the situation suggestion action this month.
Increasing the potential infusion cap can also help fund more aggressive housing turnaround programs - such as possible balance reductions on on Fannie and Freddie-backed loans - if this drastic action became necessary to help a greater number of distressed homeowners.
Financial Analysts for Barclay's Capital suggest Fannie and Freddie losses could rise to $180 Billion as soon as next year. They feel the current $400 Billion set-aside could cover these losses, but with a little less room to spare than experts might desire.
Other options under consideration to improve the financial picture for the two companies include reducing the now 10% dividend each pays the U,S. Government on the preferred stock they issued to The Fed in exchange for the bailout money.
Another involves revising requiring both companies to reduce their total mortgage portfolios, now at a combined $1.6 Trillion. Many investors, however, are afraid that private funding sources would not be able to fill the demand for mortgage funding should this occur. Should tighter mortgage financing result, this move could stymie any U.S. Housing Market Turnaround in 2010
Look for some direction before the New Year.
DEAN MOSS & DEAN'S TEAM CHICAGO
