In its controversial Christmas Eve announcement, the U.S. Treasury said the following on overhauling the housing finance enterprises of Fannie Mae and Freddie Mac after giving both of them unlimited credit lines for three years.
“The Administration is in the process of reviewing issues around longer term reform of the federal government’s role in the housing market.” Treasury also said that President Obama would provide a “preliminary report” in his fiscal 2011 budget in February 2010.
That report did not happen. This week, Treasury Secretary Timothy Geithner told Congress a plan for the reform of Fannie and Freddie would not be offered until next year.
On Friday, Fannie Mae said it wants to tap into its Treasury credit facility for an additional $15.3 billion, bringing its bailout total to more than $75 billion. It did so while reporting a $16.3 billion fourth quarter loss, including $1.2 billion in dividend payments to the Treasury.
Freddie Mac earlier this week reported a loss of $7.8 billion in the fourth quarter, and said it did not need another bailout from the Treasury for now. It had already tapped its credit line for $51 billion.
The Treasury has, in effect, re-defined risk in its contradictory assessment of the significance of Fannie and Freddie. It clearly sees Fannie and Freddie’s crucial part in stabilizing the markets by infusing liquidity into housing finance through stricter policies. But it did not put a cap on its financial liability to U.S. taxpayers, failing to fully recognize that their role needs to restructured – sooner than later.
The Treasury instead stressed a cap on the size of Fannie and Freddie’s “retained mortgage portfolios” and requires that the portfolios be reduced over time. The maximum allowable size of the portfolios is $900 billion per institution.
The Federal Housing Finance Agency is the relatively new overseer of the future practices of Fannie and Freddie, and this month it proposed stricter guidelines for both entities in meeting their goals of helping Americans into affordable housing.
The cap and the open-ended credit for three years are made possible by the September 2008 U.S. virtual takeover of the two storied, government-sponsored entities. Many believe Fannie and Freddie contributed heavily to the housing bubble by the accumulation of subprime mortgages and private-label securities laden with high-risk paper.
The Treasury’s “Preferred Stock Purchase Agreements” ensures that each firm maintains a positive net worth, and also gives the U.S. government majority stakeholder rights.
“The Treasury is now amending the 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,” Treasury said on Dec. 24.
It had previously established a $200 billion credit limit for each entity.
Not unexpectedly, the Christmas Eve announcement was blasted by Republicans and others. And it continues to be a heated topic, with many from both sides of the political aisle demanding reform now.
ABC News reported that Rep. Jeb Hensarling, R-Texas, said the following to Geithner during Wednesday’s Congressional hearing, referring to Fannie and Freddie:
The United States has deteriorated into “a bailout nation where the big get bigger, the small get smaller, and the taxpayers get poorer,” Hensarling said.
The American public/tax payers are being raped in the open. Feddie and Fannie were at the core of the entire problem. Caused by the government!! The silent majority needs to vote out EVERY encumbent until we can get these crooks out of our pockets.