Chris Isidore at CNN:
Shares of mortgage finance giants Fannie Mae and Freddie Mac soared Monday after the Treasury Department announced what essentially amounts to a blank check for their bailouts.
Treasury lifted a $200 billion limit on the amount it was ready to pump into each of the two mortgage firms after the markets closed Thursday. Fannie Mae (FNM, Fortune 500) shares leapt 21% Monday to $1.27, while shares of Freddie Mac (FRE, Fortune 500) jumped 27% to $1.60.
While the support from Treasury would appear to be a vote of confidence for the firms, the companies’ leaders apparently have no interest in owning the stocks themselves.
According to pay packages disclosed for Fannie Mae and Freddie Mac on Thursday, no stock or options are being issued to any of their top managers. That is unusual for shareholder-owned companies.
I don’t know for precisely what’s motivating the administration’s recent actions on Fannie and Freddie, but I am worried that they’re continuing to double their bets on helping the “housing market,” whatever the hell that means.
One can understand extraordinary actions to avert financial armageddon, but this just seems like an ongoing policy of trying to prop up financial institutions in a not especially smart way. I’d like to read more articles about the administration trying to help people instead of “markets.”
Peter Wallison at AEI:
It’s a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday’s paper, the least likely edition to be read. By Sunday and Monday, it’s old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises’ (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer’s stocking—it won’t even try to estimate the total losses of Fannie and Freddie.
This is the culmination of an unprecedented policy disaster, inflicted on the American taxpayer by congressional supporters of Fannie and Freddie who refused over many years to approve new and tougher regulations for the two GSEs. Now that many of these folks are in charge of the House and Senate committees that deal with financial reform, they have suddenly found new respect for regulation and are trying to apply it to the entire financial system. Perhaps the American taxpayers, acting as voters in 2010, will decide that one disaster per career is all they should be allowed.
As everyone knows there has been a massive government effort to support house prices. Some of this has been aimed at limiting supply (modification programs, various foreclosure moratoria), and some has been aimed at increasing demand (tax credit, lower mortgage rates, loose lending standards).
Here is a quote from Secretary Geithner from a recent Newsweek interview by Daniel Gross:
“We were very careful from the beginning … to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people’s basic sense of financial stability.”To help keep this straight, here is a list of the status of a number of programs:
Support for Fannie and Freddie: Treasury has uncapped the support for Fannie and Freddie for the next three years. From Treasury:
Treasury is now amending the [Preferred Stock Purchase Agreements (PSPAs)] to allow the cap on Treasury’s funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.
Fannie / Freddie Low-Cost Refinancing program. This is the program that allows homeowners with Fannie and Freddie mortgages to refinance loans up to 125 percent LTV. I believe this program expires June 10, 2010. FHA Loose Lending Standards: In his Dec 2nd testimony to Congress, HUD Secretary Donovan said the FHA would propose tighter lending standards by the end of January 2010. This included:
•Focus on enforcement and lender accountability
•Reduce the maximum seller concession from 6% to 3%.
•Raise the minimum FICO score.
•Increase the up-front cash for borrower (it isn’t clear if this is an increase in the downpayment, currently a minimum of 3.5%, or requiring the borrower to pay more fees).
•Increase FHA insurance premiums.
Various Holiday Foreclosure Moratoria: Fannie, Freddie and most of the large banks routinely suspend foreclosure activity over the holidays. This has been true this year too. Fannie and Freddie’s holiday moratoria ends Jan 3, 2010, and Citi’s holiday moratoria ends Jan 17th. The other banks programs end in early January too.There is probably more …
Jane Hamsher at Firedoglake:
Analysts are predicting that this will be “the largest cost to tax payers of all of the financial bailout programs.” It was done under the authority granted by the Housing and Economic Recovery Act (HERA) of 2008, which Rahm Emanuel cosponsored and pushed through shortly before he left for the White House.
And on Christmas eve, it was also announced that compensation packages of $4-$6 million were approved for Fannie & Freddie’s top executives.
The elite who created this mess are rewarded for their continued failure, because any solution to the foreclosure crisis apparently has to make the banks rich in the process. Just as it is with the insurance companies, the banks expect to be paid handsomely in any government program that addresses the problems they created.
There needs to be an investigation.
Update: Fannie and Freddie shares soar on the bailout news, 17% and 21% respectively.
Marla Singer at Zero Hedge:
As they hit 5%, and when they think no one is listening, Freddie whispers that 30-year rates could climb to 6% in 2010. (Rahm: “No big thing. Just sayin’ is all.”)
UPDATE: Tim Duy
Dean Baker at Huffington Post