Government will back Fannie & Freddie
The Fed and Treasury have made it clear that Fannie Mae and Freddie Mac won't be allowed to fail. Host Bob Moon asks Marketplace's Amy Scott what steps the government may take to prevent their collapse.
The logos for Freddie Mac and Fannie Mae (freddiemac.com/fanniemae.com)
More on Housing - Real Estate
TEXT OF INTERVIEW
Bob Moon: Why is the government rushing to the rescue of Fannie Mae and Freddie Mac? Consider that those two firms have accounted for almost 70 percent of all new mortgages this year. Without them, the housing market would all but seize up, so the government is seizing the moment.
Our New York Bureau Chief Amy Scott is with us. Amy, what exactly is the government's plan?
Scott: Well, the Treasury Department is asking Congress to temporarily increase a line of credit that each of these two companies has. The Treasury's also looking for the temporary authority to buy equity in either company if needed. Secretary Paulson says the idea is to make sure that they have sufficient capital to continue to serve their mission.
Moon: And what exactly are they hoping to accomplish here?
Scott: These companies either own or finance nearly half of all mortgages in this country -- more than $5 trillion worth -- so they're hugely important to the housing market and investors have been questioning whether they have enough capital to cover losses from mortgage defaults.
Allan Mendelowitz is a member of the board of directors at the Federal Housing Finance Board, which regulates the Federal Home Loan Bank System, and he says the move sends a message to the markets.
Allan Mendelowitz: What the government is basically saying is that we're going to do everything necessary to ensure that these businesses continue to function well in the marketplace and we're going to everything necessary to restore the markets confidence in these organizations.
Scott: So we'll be watching today to see how U.S. investors respond. Freddie Mac is scheduled to auction off $3 billion in debt today and analysts will be watching the auction as a sort of gauge of investor confidence.
Moon: OK, here's the big money question, though: What is this going to mean for taxpayers?
Scott: Well, you know, New York Senator Charles Schumer praised the plan, saying it would minimize the cost to taxpayers. It appears to be designed to boost investor confidence without actually injecting any cash yet, but if the government does end up stepping in and either loaning money to Fannie and Freddie or investing in them, that could certainly leave taxpayers could be on the hook.
Moon: Our New York Bureau Chief Amy Scott. Thank you.
Scott: Thanks Bob.
Comments
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From Dallas, TX, 07/14/2008
There has been too much panic in the media about Freddie and Fannie's losses.
These companies were created by the federal government to be the fuel line and the shock absorbers of the mortgage industry.
For decades they performed their fuel line duty and lowered our mortgages by about 1%. Now, by absorbing losses they are protecting the conventional mortgage market from collapse.
Even a bailout would be far cheaper to the taxpayer than what would have happened if all mortgages operated the way sub-prime and jumbo loans do.
Instead, for once, our government is planning to do something brilliant. By extending the credit limit and buying their stock, they are ensuring that those companies will remain solid and recover from the losses... while at the same time buying stock while it is at bottom price. By the time all is said and done, taxpayers may even make a profit on the investment!
So... let's keep a bit of perspective here. Freddie and Fannie investors may be loosing their shirts. Investors in mortgage backed securities aren't loosing their principal... only expected interest gains. And the rest of us, we are probably benefiting by the fact that these companies are there to absorb the impact.
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In case it is relevant, I worked for Freddie Mac for about 10 years ending around 1997. During those years they used to make a big deal that they were setup in such a way that they could survive 10 years of 1920's style recession (**survive**, not come out unscathed).
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