In recent weeks, there has been much speculation about the stability of mortgage giants Fannie Mae and Freddie Mac. Sliding stocks have demonstrated the growing worries that the companies capital will not be enough to withstand losses stemming from rising loan defaults.
Last Sunday, the White House and Federal Reserve made moves to ensure the survival of both Fannie Mae and Freddie Mac in the midst of market uncertainty.
Fannie and Freddie, in combination, finance about 50% of homes in the U.S., equaling $5.2 trillion in owned or guaranteed mortgages. Though it’s commonly assumed that the two are government agencies, in actuality they are government sponsored entities chartered by congress but owned by shareholders.
The details of the government’s plan are still being worked out, but the basics involve the Federal Reserve’s agreement to lend money to the two companies at a discounted rate, allowing them to borrow at the same rate it charges banks.
The Treasury Department is seeking authorization to increase the government’s credit line and buy more stock in both companies. The current credit line limits are $2.25 billion each.
So far neither company has tapped the newly available funds, and many believe their original capital will sustain them without ever having to borrow.
The gestures by the Treasury Department and Federal Reserve will come with a string attached—congress is being asked to grant the Federal Reserve a consultant status for the companies. Through the Housing Rescue Package, currently moving through congress, the Treasury Department is seeking an even greater role for the Fed, moving to allow them to work in more of a side by side role with both Fannie and Freddie.
This recent news is further indication that the market continues to change during this tumultuous period. With the uncertainty of what rates will do, and changing guidelines, those who are considering buying would be well advised to secure financing sooner rather than later.