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Home >> News >> Government >> Is New Treasury Plan Beginning of the End for the GSEs?
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Is New Treasury Plan Beginning of the End for the GSEs?

Is New Treasury Plan Beginning of the End for the GSEs?

Government sponsorship for ""Fannie Mae"":http://www.fanniemae.com/portal/index.html and ""Freddie Mac"":http://www.freddiemac.com/ was never popular with many on Capitol Hill.

Lawmakers from both parties understood that their takeover in 2008 would translate into billions of dollars in taxpayer losses ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô roughly $180 billion to date ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô if the companies failed to climb back to their feet. Not the best career move if you want to seek reelection in a campaign season ""already framed around heady differences over Uncle Sam's role in society"":http://www.nytimes.com/2012/08/16/us/politics/ryan-pick-shifts-focus-from-economy-to-ideology.html.

And so, on Friday, after years of bills from lawmakers to reform Fannie and Freddie, the ""Treasury Department"":http://www.treasury.gov/Pages/default.aspx unveiled a plan to finally ""wind down"" the mortgage giants.

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The plan? According to a ""release"":http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx, the Treasury Department will end a past ""circular"" arrangement with Fannie and Freddie that allowed the companies to repay the agency with the very funds it received in the first place. The new agreement will divert any quarterly profits for Fannie and Freddie to Treasury in order to repay taxpayers.

Treasury also amended the bailout deal to up the draw-down rate for the GSEs' investment portfolios to 15 percent, a change from 10 percent.

According to the release, the change will force Fannie and Freddie to reduce their investment portfolios to the original target of $250 billion, four years earlier than scheduled.

""Michael Stegman"":http://www.linkedin.com/pub/mike-stegman/3/b13/12a, housing finance counselor to Treasury Secretary ""Timothy Geithner"":http://www.treasury.gov/about/Pages/Secretary.aspx, said in a statement that the moves signal ""the next step toward responsibility winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market.""

[COLUMN_BREAK]

Will it mark the beginning of the end of the mortgage giants as we know them?

Just maybe, if you listen to someone like former Oklahoma Gov. ""Frank Keating"":http://www.aba.com/press/Pages/fkeating_bio.aspx, president and CEO of the ""American Bankers Association"":http://www.aba.com/Pages/default.aspx, which applauded Treasury in a separate statement.

""Today's changes are consistent with the FHFA's strategic plan and the ABA's reform priority of a reduced government presence in the housing market,"" he said. ""Much more work needs to be done to reform the secondary market, but today's announcement helps move this process forward and ensure the taxpayers' investment is ultimately repaid.""

That strategic plan he references is the one and only that the Federal Housing Finance Agency ""released"":http://www.themreport.com/articles/fhfa-proposes-remaking-secondary-market-downsizing-gses-2012-02-21 in February earlier this year.

The 21-page proposal laid out steps to slowly transfer Fannie and Freddie off the taxpayer dime, shift risk to institutions able to shoulder $100 billion in new originations each month, and stand up a new securitization platform separate from federal guarantees.

Interestingly, the FHFA also said that the GSEs' ""ongoing operations are entirely dependent on... the Senior Preferred Stock Purchase Agreements.""

And ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô point-blank ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô that their losses were so large that neither Fannie nor Freddie could ever fully reimburse taxpayers ""in any foreseeable scenario.""

Ouch.

Still, if this is the beginning of the end for federal funds for the two arguably most important mortgage companies in America, now may be the time to start closing the books.

Fannie recently ""posted $2.8 billion in second-quarter net worth"":http://www.dsnews.com/articles/fannie-mae-forgoes-taxpayer-support-in-q2-2012-08-08, allowing it to evade Treasury draws for only the second straight quarter in the past 13. Freddie ""avoided the draw for the first time in June"":http://www.dsnews.com/articles/freddie-mac-wont-draw-from-treasury-this-quarter-2012-08-07 with $1.1 billion in net worth.

*What do you make of the Treasury plan to wind down Fannie and Freddie?* Is the time ripe for transformation in the secondary market, or is it too soon? Or even too helpful to reelection-minded politicians?

Email us with your thoughts at [email protected] for a chance to appear in our monthly magazine.

About Ryan Schuette

Ryan Schuette
Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.

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