Posts Tagged ‘taxpayer money’

Next Up on the Presidential Agenda? Reforming Fannie and Freddie

Thursday, August 5th, 2010

Reforming Fannie Mae and Freddie Mac is next on President Obama’s to do list.  The next item on President Barack Obama’s ambitious agenda is likely to be overhauling Fannie Mae and Freddie Mac, the government-backed mortgage firms that so far have cost American taxpayers $145 billion to keep afloat.  The two firms, which own more than half of the nation’s $11 trillion in home mortgages, collapsed along with the housing market and were taken over by the federal government in September of 2008.

Many Congressional Republicans believe that scrapping Fannie and Freddie is mandatory; Democrats disagree and President Obama is expected to support reforms backed by consumer, real estate and banking groups.  The core of the emerging consensus is to preserve the 30-year, fixed-rate mortgage.  Susan Woodward, former chief economist at the Department of Housing and Urban Development (HUD) and a founder of Sand Hill Econometrics, said “People regard it as a right as Americans to get a 30-year, fixed-rate loan.”

Banks and builders agree with consumer advocates representing homebuyers that it’s good for the government to promote residential lending by supporting what Fannie and Freddie have done for years – purchasing mortgages and bundle them into securities that they sell to investors.  When the system works as intended, the MBS market creates additional money that is funneled back into the market to make new affordable loans.  The task is to determine how to accomplish this without the lax practices that the taxpayers had to pay for when catastrophic losses occurred in 2008.

The Obama Administration and leading Democrats strongly believe that the federal government should have a role in promoting homeownership.  Shaun Donovan, HUD Secretary, said “We should not compromise any of our core policy goals in the decisions we make in structuring our house financing system.”

First CMBS Under TALF Is on the Horizon

Monday, November 9th, 2009

first-cmbs-under-talf-is-on-horizonThe markets are keeping a close eye on a transaction that may jump start the commercial property debt market, even though the Federal Reserve has expressed some uneasiness with the deal.  If the transaction is successful, it could pave the way for the initial sale of commercial mortgage-backed securities (CMBS) under the government Term Asset-Backed Securities Loan Facility (TALF).  The credit-hungry commercial real estate industry is hoping that the debt sale by shopping center owner Developers Diversified Realty Corporation will lead to additional CMBS sales.

Developers Diversified has obtained a $400 million loan from Goldman Sachs Group, Inc., which is intended to be converted into a CMBS offering through TALF.  The Fed, keeping the taxpayers’ best interests in mind, has reservations about financing the transaction since it involves a single borrower.  These are considered riskier than deals involving multiple borrowers, where the risk is spread over different borrowers, building type and even location.

“The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse,” said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm.  Currently, the Fed is reviewing the transaction, which involves 28 shopping centers with stable cash flows.  If the Fed says “no” to the transaction, Goldman Sachs is said to be considering selling the $400 million loan outside TALF.

TALF was created to revive the CMBS market, as well as jump start securitized debt markets by offering low-cost financing from the Fed so investors can once again purchase these securities.  The program lets investors borrow as much as 95 percent of the bonds’ value by pledging the securities as collateral – meaning the risk is on taxpayers if there is a default.

Fannie, Freddie and the American Taxpayer

Thursday, September 11th, 2008

As the United States government commits a bare minimum of $100 billion of taxpayer money to bail out Fannie Mae and Freddie Mac, the final reckoning depends on how effectively Washington runs the mortgage powerhouses.

According to the Christian Science Monitor, with the sheer magnitude of Fannie and Freddie – with $5 trillion in home loans on their combined books – the taxpayers’ burden is likely to add up to billions of dollars very quickly. 00037darling-let-s-get-deeply-into-debt-postersThe worst-case scenario could see the tab rise as high as the $125 billion it cost the taxpayers in the early 1990s to bail out failed savings-and-loan institutions. The rosiest scenarios hypothesize that the short-term cash infusion might be recouped with little or no net cost to the taxpayers.

Part of the reason that Fannie and Freddie are under conservatorship is that foreign central banks and investors have been divesting themselves of American mortgage debt, because they are nervous about falling prices, weak credit and the weak dollar. Since foreign ownership represents $1.4 trillion, it is a sizable piece of the puzzle.

The bottom line is that every U.S. taxpayer is now tied directly to the troubled housing market. And the stakes here are significantly higher than the government’s $30 billion bailout of Bear Stearns. The ultimate cost to taxpayers is tied directly to the depth of the housing slump. If housing prices continue to fall and foreclosures rise, the losses to Fannie and Freddie will increase. The opposite scenario would be far better news for taxpayers.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs), because Congress chartered them to create a stable mortgage market. They have functioned well by guaranteeing home loans or buying them outright. Even with steep declines in the number of sales and prices, investors have continued to fund home loans with a Fannie or Freddie seal of approval; this has kept mortgages relatively available and affordable.

The Treasury Department had no alternative but to intervene, become an equity investor in Fannie and Freddie, and a buyer of their mortgage-backed bonds. Their objective is to restore consumer confidence in the credit markets, reduce the cost of mortgages, and help the housing market recover.