On Friday, Henry Paulson (the U.S. Secretary of the Treasury) and James Lockhart (the director of the Federal Housing Finance Agency) announced that the U.S. government is putting Fannie Mae and Freddie Mac into conservatorship — the government is bailing the two companies out. The move is an effort to guarantee that there is still money available to the two companies so that they can continue buying MBSs (mortgage-backed securities) and allowing other banks to loan money.
Paulson’s move is already being described as “one of the most sweeping government interventions in private financial markets in decades.” Journalists and economists have spent the weekend discussing the consequences for the government, the companies and the economy. But what does a bailout mean for the rest of us?
Paulson’s Plans for Conservatorship
During the announcement, Paulson named four things that he planned to do with Freddie Mac and Fannie Mae:
- The two companies will modestly increase their MBS portfolios (meaning that smaller banks will be able to issue more mortgages) until the end of 2009. Starting in 2010, the two companies will start reducing their MBS portfolios. For the most part, that means that Fannie Mae and Freddie Mac will be selling off the mortgages they hold to other companies, starting in 2010. Depending on how willing other companies are to buy mortgages, it may get harder to get a mortgage in 2010.
- The Treasury Department and the FHFA will use Preferred Stock Purchase Agreements to make sure that both companies maintain a positive net worth, as well as guarantee to debt holders that they will be paid.
- The Treasury Department is creating a new ’secured lending credit facility’ — a governmental agency that can lend money to companies like Fannie Mae when they can’t get loans elsewhere.
- The Treasury Department is temporarily buying MBS in order to make sure that banks are capable of offering mortgages even with the normal backers / buyers of MBS slowing down their purchases.
Fannie Mae and Freddie Mac Stocks
The government isn’t helping out stockholders as a part of the bailout. Anyone with stock in either company is no longer receiving dividends and the values of those stocks have dropped dramatically. The fact that the government is stepping in has actually caused both stocks to fall further.
There’s no guarantee that the stock situation will improve, either. Unfortunately, if you hold stock in either Freddie Mac or Fannie Mae, you have very few options.
Freddie Mac and Fannie Mae Mortgages
If you currently have a mortgage held by either company, very little changes. You still have an obligation to make your payments and there shouldn’t be any changes to how the company operates at that level. The same goes for any other loans you have from either company, as well. The conservatorship is specifically set up to make sure that Freddie Mac and Fannie Mae continue operations as normal.
At upper levels, however, there will be quite a change up — executives and boards at both companies will be leaving.
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September 9th, 2008 at 4:12 pm
Ms Bram,
Home ownership is called, “The American Dream”, however, given the way the financial house of the nation is currently run, I rather would call it, “The Great Rippoff of the American Home Buyer”. I say this because American home buyers are subsidizing the wealthy of this planet by paying twice or three times the cost of the house over the life-time of their mortgages–not to mention the horrendous property taxes etc. which are incidental to “home ownership”. There must be a better way to allow folks to live in houses and not transfer some much wealth to the idle, capital owning entities and individuals. I make these remarks in nearly total ignorance, but my common sense and residual Scottish genes tell me there is a huge fly in the ointment of the American Dream of house tenancy at the mercy of the banks and mortgagers. One last thought, just imagine the chaos that will prevail in the US it there is a major eco-meltdown and a substantial fraction of mortgage holders can’t come up with their monthly mortgage payment. It will make the current mess look like a minor flap! As I have said before, American laissez-faire capitalism (a la Chicago School of Economics and the neo-con practitioners thereof) WILL KILL CAPITALISM. If you look at the current mess, those folks who yapped about government controls and who denigrated goverment regulations, are precisely the folks who have their hands out stretched for a government bail-out. A mixed economy with only the necessary government intervention to keep the crooks in line, and to defend the weak and improvished is absolutely essential for an American Society that resembles anything like the America of my dreams. Of course, my dream is the only one that counts. HA!
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