Fannie Mae's and Freddie Mac's Financial Problems

The continuing conservatorship of Fannie Mae and Freddie Mac at a time of uncertainty in the housing, mortgage, and financial markets has raised doubts about the future of these enterprises, which are chartered by Congress as government-sponsored enterprises (GSEs) and whose debts are widely believed to be implicitly guaranteed by the federal government. In the second quarter of 2012, both Fannie Mae and Freddie Mac reported profits for the first time since the fourth quarter of 2006. Also, the second quarter of 2012 was first time that neither GSE had to request financial support from the Treasury. The Treasury has agreed to buy mortgage-backed securities (MBSs) from the GSEs and to raise funds for them. Initially, each GSE gave Treasury $1 billion in senior preferred stock and warrants to acquire, at nominal cost, 80% of each GSE. Treasury holds more than $187 billion of preferred stock in the two GSEs. Treasury has agreed to invest whatever is required to maintain GSE solvency through calendar year 2012. Now the formerly implicit guarantee is nearly explicit. In addition to Treasury's purchases of senior preferred stock, the Federal Reserve (Fed) has purchased GSE bonds and MBSs. Under terms of the federal government's purchase of their preferred stock, the enterprises are required to pay the government dividends of nearly $20 billion annually (10% of the support). Housing, mortgage, and even general financial markets remain in an unprecedented situation. Estimates of the total cost to the federal government use different baselines and vary widely. The FHFA estimates that Treasury is likely to purchase $220 billion-$311 billion of senior preferred stock by the end of 2014. The Congressional Budget Office estimates the budget cost to be more than $300 billion. Standard & Poor's has estimated the cost at $280 billion plus $405 billion to create a replacement system. Once Treasury's support for Fannie Mae and Freddie Mac ends, sometime after 2012, the GSEs will be challenged to pay the 10% annual cash dividend contained in their contracts. The enterprises could instead pay a 12% annual senior preferred stock dividend indefinitely. In August 2011, Standard & Poor's downgraded the debt of the federal government, Fannie Mae, and Freddie Mac. To date, there is no evidence that this has increased mortgage interest rates, but the impact may take longer to occur or to be detected.

Author: N. Eric Weiss

Publisher: Createspace Independent Publishing Platform

Publication Date: Oct 20, 2012

Number of Pages: 30 pages

Binding: Paperback or Softback

ISBN-10: 1480151564

ISBN-13: 9781480151567