Fannie Mae And Freddie Mac Get A Break In The Terms Of Government Assistance

Friday, August 17, 2012 07:03
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Fannie Mae And Freddie Mac Get A Break In The Terms Of Government Assistance

Tags: Economic Outlook | mortgage debt | U.S. economy

The terms put in place when the government bailed out Fannie Mae and Freddie Mac are proving to be too onerous. They have investors worried that, at some point, support from the Treasury might run out and Fannie Mae and Freddie Mac would fail. So the government has changed the terms to be more favorable.

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Currently, the two firms are required to make a 10% payment to the Treasury each quarter. On some occasions, the two firms have had to borrow even more money from the government to make those payments.
 
The new arrangement would position the payment as a dividend that could be suspended if the two firms fail to turn a profit during a particular quarter. The new terms also will help accelerate the mortgage portfolios of the two firms.
 
Under the current terms, the two are required to reduce the size of their portfolios by 10% each year. The new terms would up that amount to 15%. This would put both of them at the final portfolio cap size of $250 billion by the end of 2018, four years earlier than originally planned.
 
The new terms also prevent the firms from rebuilding capital. This will disappoint hopes of investors that the two might once again be profitable over and above their ability to repay the government for its assistance.
 
The purpose of reducing the size of the portfolios is to keep the two firms from becoming too large a part of the marketplace. The fees charged to lenders have also been increased. These moves are designed to keep help stem the losses—a move that has succeeded—and enable them to once again be profitable but not to run the risk of failure through overextension.

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