Fannie Mae and Freddie Mac, government sponsored enterprises (GSEs), were placed into a conservatorship Sunday by the U.S. Dept. of the Treasury. The Federal Housing Finance Agency (FHFA) will serve as the conservator, and the CEOs of each company were relieved of their duties. Replacing them are Herbert Allison, former Merrill Lynch vice chairman, and David Moffett, former U.S. Bancorp CFO, who will now lead Fannie Mae and Freddie Mac, respectively.
MAKING SENSE OF THE STORY· Under the conservatorship, the FHFA has the authority to take up to an 80 percent stake in the companies, and will review both GSEs’ financial condition quarterly. The federal government also may inject capital into Fannie Mae and Freddie Mac, if needed. Both GSEs will be allowed to increase their mortgage funding over the next year and a half, and their stock will continue to trade, with stockholders retaining all rights in the stock’s financial worth. However, the plan does call for a 10 percent reduction per year to GSEs’ portfolios, beginning in 2010, until they have been reduced to $250 billion.
· Although the conservatorship has resulted in lower interest rates for consumers, and restored investor confidence, the Treasury and the new CEOs will change the mission and role of GSEs. Without GSEs, mortgage capital eventually will be less predictable and more expensive. This may result in adjustable-rate mortgages becoming the standard loan for home buyers, as well as higher down payment requirements, and the possible disappearance of the 30-year fixed-rate mortgage.
· Most industry professionals support a structure that maintains GSEs in their current countercyclical roles and is urging lawmakers to support continued government involvement in supporting the institutional secondary market. As a result of these concerns, Realtors and others in real estate will be asking Congress to enact legislation to ensure GSEs continue to fulfill their congressional mission of supplying an affordable and stable flow of capital for home loans.
