Recently, The Federal Government announced a rescue plan for the GSEs, Freddie Mac and Fannie Mae. Here are some key highlights copied from a memo that I received from Hemman Sweis and Brian Shaktah of Metro Cities Mortgage.
Major Points
- Fannie and Freddie have been placed in conservatorship. The Federal Government has taken 79.9% of common stock and all dividends in return for buying $1 billion in preferred shares.
- Treasury Department says that both are open for business with no major changes in operations.
- Top Fannie/Freddie executives have been replaced.
- Fannie/Freddie can grow their guaranteed mortgage book with no limits and grow their retained portfolio with limits. Ultimately, the government plans to shrink their portfolios 10% per year starting in 2010.
- The federal government will provide caoital to keep Freddie/Fannie’s net worth positive, (up to 100 billion). In return, the Treasury will receive new senior preferred stock and warrants on the GSEs’ common stock.
- The federal government will begin buying Fannie/Freddie mortgage-backed securities on the open market.
- Treasury Department will create a Secured Lending Credit Facility, a liquidity Backstop for GSEs.
Initial Reactions
- Rates drop half a point!
- World markets respond positively to the news: Stocks up on Monday, September 8, 2008.
- Federal Reserve Chairman Ben Bernanke: “These necessary steps will help to strengthen the US housing market and promote stability in our financial markets.”
- Investor Warren Buffett: “Secretary Paulson has made exactly the right decision for the country. He is minimizing the problem of moral hazard and maximizing the benefits for the housing market and for the smooth functioning of the financial markets.”
Anticipated Results
- Rates to possibly stabilize, due to reassurance given by government intervention.
- Increased confidence in financial markets.
- Loan term changes possible (FICO, LTV)
- More loan workouts possible due to increased government pressure on lenders to create solutions that prevent foreclosures.
If you have any questions about the Fannie Mae/Freddie Mac Takeover, please feel free to contact me at robert@lacarealestate.biz. If I cannot answer your question, I will find someone who can!
