U.S. Attempts to Comfort Fannie and Freddie Debt Holders
Representative Barney Franks (D., Mass) recently made several comments concerning the U.S. Treasury's commitment to fully back mortgage securities that are being held within Freddie Mac and Fannie Mae.
Mr. Franks stated that debt holders should not expect to be treated the same as investors in U.S. Government Bonds. The U.S. Treasury responded quickly to Rep. Frank's comments by stating that they are committed to protecting debt and securities holders. The Representatives comments were meant to make the public aware that even though the federal government has conservatorship of both Fannie Mae and Freddie Mac, these two companies are still private entities and bear no protection, or guarantees to private investors.
It was approximately 18 months ago that the federal government took conservatorship of both Fannie Mac and Freddie Mac. The U.S. Treasury has contributed $127 billion into the two companies in an effort to offset the massive losses that Freddie and Fannie suffered due to defaults. Last December's decision by the Treasury to uncap the previous $400 billion dollar ceiling left potential overseas investors less anxious, but comments like the ones made by Rep. Barney Franks has the potential to bring additional fears to an already volatile market.
Throughout the governments conservatorship of Fannie Mae and Freddie Mac there has never been an outright guarantee by the U.S. Treasury Department that any securities held by either of these private companies were fully back by the government.
Currently Freddie Mac and Fannie Mae hold a combined $1.6 trillion in debt, and $5 trillion in new home mortgage backed securities. The government will continue to assist both of these companies for at least the next three years. Many economists agree that the total amount of tax payer dollars spent on keeping these companies solvent will exceed the originally allotted $400 billion.
Mr. Franks stated that debt holders should not expect to be treated the same as investors in U.S. Government Bonds. The U.S. Treasury responded quickly to Rep. Frank's comments by stating that they are committed to protecting debt and securities holders. The Representatives comments were meant to make the public aware that even though the federal government has conservatorship of both Fannie Mae and Freddie Mac, these two companies are still private entities and bear no protection, or guarantees to private investors.
It was approximately 18 months ago that the federal government took conservatorship of both Fannie Mac and Freddie Mac. The U.S. Treasury has contributed $127 billion into the two companies in an effort to offset the massive losses that Freddie and Fannie suffered due to defaults. Last December's decision by the Treasury to uncap the previous $400 billion dollar ceiling left potential overseas investors less anxious, but comments like the ones made by Rep. Barney Franks has the potential to bring additional fears to an already volatile market.
Throughout the governments conservatorship of Fannie Mae and Freddie Mac there has never been an outright guarantee by the U.S. Treasury Department that any securities held by either of these private companies were fully back by the government.
Currently Freddie Mac and Fannie Mae hold a combined $1.6 trillion in debt, and $5 trillion in new home mortgage backed securities. The government will continue to assist both of these companies for at least the next three years. Many economists agree that the total amount of tax payer dollars spent on keeping these companies solvent will exceed the originally allotted $400 billion.
Comments (5)
They do help consumers afford homes sooner...whether or not that is a good thing for society as a whole is debatable. I agree that I would rather see the logjam freed up for buyers than for the money to go to the idiot banks that are supposed to know what they are doing.
Bryan Hancock, over 14 years ago
The only solace I can take from their bailout is they do directly impact consumers, unlike bohemeths such as AIG and Bank of America which I would have liked to see go down. Those two and others that were saved simply drain consumers, and even more so after the bailouts. FNMA and Freddie need massive overhauls or to be replaced.
Ted Akers, over 14 years ago
The answer is....never! The Fed is purchasing toxic waste securities because no else wants them. Oh...heck....what is another $1T when our debt is mushrooming to $12T?!
Bryan Hancock, over 14 years ago
I agree Bryan. It is a bit of a Catch 22 now. The implied, or otherwise, guaranty is important to both the financial and mortgage markets. However, something needs done and congress is not in the mood to deal with it right now. There have been talks or thoughts about revampiing or replacing both for over a year now. If not now, when?
Ted Akers, over 14 years ago
Fannie and Freddie are an absolute abortion that needs to be dealt with post haste. With today's technology buyers should be able to sync up with investors in secondary market without having to pay all of these gov-mint and bank bureaucrats to shuffle paper around...if the dutch can do we surely can! Bloated government bureaucracies are entitlement black holes that are impossible to slay once they reach critical mass. The economics of the current system are unsustainable and our inept legislature refuses to address the problem...I guess there is no political currency in telling voters that they are nixing their fantasy world debt structure!
Bryan Hancock, over 14 years ago