Twice as Effective & Twice as Sovereign: Fannie / Freddie Backstop Swells 100% to $400 billion

"Effectively my @^%$$" – me, October 24, 2008.

"Resetting these agreements from $100 to $200 billion each should remove any possible concerns debt and mortgage-backed securities investors have about the strong commitment of the U.S. Government to support Fannie Mae and Freddie Mac," said James Lockhart, director of the Federal Housing Finance Agency, which oversees the companies [in remarks earlier today]. [1]

… expliciter and expliciter …

Earlier today it was reported that Obama’s big housing bailout quietly doubled government support to the already quasi-nationalized mortgage finance giants Fannie Mae and Freddie Mac.  Not only that, but this report [2] asserts that "… the [new] plan extended the government’s line of credit with the GSE’s and enabled Treasury to take an equity stake in the firms."

Doomers should re-read this earlier Doom post detailing Bush protege Lockhart’s earlier adventures with the infamous "effect guarantee" on the GSE Agency Debt.  The bottom line is that agencies today took a giant step towards achieving the status of officially acknowledged Sovereign Obligations of the United States of America.  Put another way, it’s beginning to look like the OMB will soon have to double its number for America’s national debt.

—————

[1]: "Government Doubles Available Aid to Fannie and Freddie", by Binyamin Appelbaum, Washington Post, February 18, 2009.

Fannie Mae and Freddie Mac were seized by the government in September to stabilize their role as the main source of funding for the mortgage lending industry. The government pledged up to $200 billion to cover the companies’ losses, but officials said at the time they did not expect the companies to need that much help.

[2]: "Treasury Boosts Funds For Fannie,Freddie To $200 Billion Each", by Maya Jackson Randall and Jeff Bater, Dow Jones / EasyBourse, February 18, 2009.

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2 Comments for this entry

  1. twist says:
    February 18, 2009 at 5:19 PM

    John-

    The officials must have consulted the Wall Street “analysts” who the MSM is always saying were shocked when this or that report comes in below “expectations”.

    I’m wondering if being "expliciter" will even help.  I saw this comment in a Forbes article today:

    Lower interest rates obtained by refinancing could spark a wave of pre-payments on mortgages. That would spell bad news for investors who own mortgage-backed securities guaranteed by the companies and who make money when rates are higher.

    “It may also have a detrimental effect on [mortgage-backed security] pricing because investors will be worried about prepayment,” says Guy Cecala, publisher of the trade publication Inside Mortgage Finance. In other words, it raises questions about who will buy the companies’ mortgage-backed securities.

    Taxpayers don’t get off the hook either. "At some point the government will have to take all the bad mortgages and [mortgage-backed securities] off the balance sheets of Fannie and Freddie," says Peter Wallison, a fellow at the American Enterprise Institute who has studied the mortgage buyers in detail. "That’s where the taxpayers will recognize the loss." At that point, he says, Congress will likely want to recreate the Fannie and Freddie as government-sponsored entities.

    The Obama administration may find that this doesn’t work as well as they thought.

  2. Coffee says:
    February 18, 2009 at 9:00 PM

    prepayment risk has been “cooked in the price” since 11/08.

    Cost of closing loans has increased 100%.

    Today, out of the blue, many lenders closed Private mortgage insurance.

    This is scary: many lenders closed will not accept 740 ficos and 20% equity. Regardless of what the govy wants, there has to be a buyer for this paper.

    http://www.bloomberg.com/apps/news?pid=20601103&sid=aoGAicgx.trY&refer=us

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