Posted by: Roby Robertson | September 9, 2008

Lake Norman Real Estate, Our take on the Govt. Bailout of Fannie and Freddie

What does the bailout mean to Lake Norman Buyers and Sellers

Our CEO at Real Living participated in a conference call with the Department of Treasury and the new Fannie/Freddie regulator.

As he often does, he shares his view on what it means:

First a couple of definitions:

GSE – Government Sponsored Enterprise
MBS – Mortgage Backed Securities

–in the short term the move will provide stability to the mortgage market by easing capital concerns at Fannie and Freddie

–Many believe, including NAR Chief Economist Lawrence Yun, that the Treasury move could reduce mortgage interest rates in the short run.  

–We believe that the new management at Fannie and Freddie will keep its business partnerships intact

–Through 2010, the Dept of Treasury plans to grow Fannie and Freddie’s portfolios; i.e. the intent appears to be to expand Fannie and Freddie business, at least during the housing downturn

–We think that Fannie and Freddie may actually loosen up credit standards to help stimulate the mortgage market

–Concerns about stable domestic and foreign debt investment in the GSEs was likely the primary driver for the fed move.

Longer term:  

It seems that the Treasury plan basically reverts Fannie and Freddie to a facility for federally backed mortgage debt.   The Treasury theory appears to be to employ the GSEs as a counter cyclical model

— when times are tough they will ratchet up the companies; when the environment is more “normal” they will ratchet back and let the private market carry the ball.  

Regarding the future structure of Fannie/Freddie:    Next year Congress and the new administration and all interested parties will be consumed with the question of what the post conservator GSEs look like.

Here are the main facts regarding the federal action:

Conservatorship
Fannie Mae and Freddie Mac are placed into conservatorship immediately.  (No change in status for the Federal Home Loan Banks.)

GSE Portfolios
To promote market stability, the GSEs will be allowed to increase their MBS portfolios through the end of 2009.  However, starting in 2010 the portfolios will gradually be reduced at a rate of 10% per year through run-off, eventually stabilizing at a much lower size.

Treasury Preferred Stock Agreement
Treasury and the Federal Housing Finance Agency (FHFA) have established a Preferred Stock Purchase Agreement to ensure that each company maintains positive net worth.  These agreements are intended to provide security to GSE debt holders and MBS investors.  In exchange, Treasury receives a senior preferred equity share and warrants to protect taxpayers – common and preferred shareholders will bear any potential losses ahead of the government’s senior preferred shares.

Secured Lending Credit Facility
Treasury has established a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.  This facility is intended to serve as an “ultimate liquidity backstop.”  This facility will expire on December 31, 2009.

Treasury Program to Buy GSE MBS
Later this month, Treasury will be initiating a temporary program to purchase Fannie Mae and Freddie Mac MBS.  Such purchases will be made as appropriate.  The program will expire on December 31, 2009.

Other highlights

  • On Monday, the GSEs are expected to resume normal business operations.
  • The U.S. government assumes control over the Board and management.
  • Current Fannie Mae and Freddie Mac CEOs are being replaced, but will stay on through a transition period.
  • Herb Allison will assume CEO duties at Fannie Mae, and David Moffett will assume CEO duties at Freddie Mac.
  • There will be limited initial management actions – they will work with the current management team.
  • There will be no dividends paid on preferred or common stock.
  • All lobbying/political activity by the GSEs will cease.

We believe that this is a good move to get the housing market moving in the right direction.  Everyone that is sitting on the fence can begin to start thinking about the move that want to make.

If you want additional information about this or any of our Lake Norman Area Communities, please contact your Lake Norman Agent at 704 451 7051 or by email.

See Also:

Lake Norman Golf and Waterfront Communities

Why Lake Norman is such a great destination

Roby Robertson

 

Saving My Clients Thousands

Broker/Owner

 

Real Living In Style
Davidson NC

 

roby.robertson@realliving.com

 

Ph: 704 451 7051
Fax: 704 892 9766

Committed to Saving My Clients Thousands When Buying and Selling Real Estate

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