Fannie and Freddie to the Rescue?

Source:BusinessWeek.com Author:Dawn Kopecki Date:03/25/14 Click:
Hoping to speed delivery of its $150 billion pick-me-up for the U.S. economy, the Bush Administration reluctantly agreed to temporarily increase the size of the mortgages Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) can purchase, from $417,000 to nearly double that. Proponents of the shift hope that Fannie and Freddie -- which together own or guarantee about half of the $10 trillion in total home loans in the U.S. -- can unfreeze the market for those "jumbo" loans and kick-start the housing market. But for a variety of reasons, Fannie and Freddie may not be in position to cure the subprime mortgage mess.

Economists and analysts agree that boosting the mortgage limit will help inject the jumbo loan market, which is under significant strain, with much-needed financing. The additional business Fannie and Freddie will generate with that financing should eventually help bring down prices and increase the availability of such loans. However, the two companies still haven't fully rebounded from the big accounting scandals that first came to light in 2003. With substantially thinner profit margins and tighter regulatory constraints, they have limited financial freedom to bail out others' bad investments.

"The real issue is that home prices are overvalued, and it gets uglier by the day. This might help on the margin, but it's not going to stop home prices from falling," says mortgage analyst Paul Miller of Friedman, Billings, Ramsey (NYSE:FBR - News). "It's not going to solve the problem, but it's a way for (Democrats) to get something through that they've wanted for a very long time."

"A Bipartisan Steamroller"

The measure is part of a broad package of tax incentives that policymakers have frantically cobbled together over the last week as global fears of a U.S. recession drove international markets into bear territory. Washington seemed unable to calm jittery investors until the Federal Reserve intervened Jan. 22 with an unexpected 0.75-percentage-point emergency cut in its target rate for overnight loans between banks. After months of rose-colored reassurances, policymakers are finally acknowledging that the housing crisis could pull the U.S. economy into recession.

"It is timely, it is targeted, and it is temporary. And it was done in record time," House Speaker Nancy Pelosi (D-Calif.) said in announcing the deal on Jan. 24 with Treasury Secretary Henry Paulson.

In the frenzy, the Administration surrendered its opposition to lifting the limits on Fannie and Freddie. Bush officials had been pushing for a broader bill that would tighten the Office of Federal Housing Enterprise Oversight's (OFHEO) regulation of the two companies. Worried the companies are too highly leveraged and aggressively managed, the Bush Administration, the Fed, and Republicans on Capitol Hill have been pushing for legislation to expand the power of the OFHEO to at least match that held by other financial regulators. Unlike the Fed, the Federal Deposit Insurance Corp. (FDIC), and other federal agencies, the OFHEO has limited authority to raise Fannie's and Freddie's capital requirements and lacks the power to place either into receivership and pay out bondholders if either company should fail, among other things.

"I got run down by a bipartisan steamroller," Paulson said in explaining the about-face. "I was somewhat skeptical that, without this, we wouldn't get the reform. So now I've got to be an optimist."

Not everybody on the Hill was happy with the package. Senator Max Baucus (D-Mont.), chairman of the powerful Senate Finance Committee, announced he'll hold hearings next week to put together his own stimulus plan. The bipartisan plan, which awaits approval by both houses of Congress and signing by President Bush, could also deliver tax-rebate checks to qualifying individuals as early as June. Under the deal, individuals who pay income taxes would get an advance of up to $600 on next year's refund, and working couples would get up to $1,200. Those with children would receive $300 in additional tax credits for each dependent.

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