Treasury briefs candidates on plan to seize Fannie, Freddie
Real Estate News from the We Buy Houses Team
Treasury Secretary Henry Paulson briefed Obama late Friday on plans to seize, perhaps as early as this weekend, Fannie Mae and Freddie Mac in an effort to bolster the pair and calm jittery global financial markets.
Paulson told Republican John McCain that Fannie and Freddie - which purchase mortgages from banks and package them into popular bonds sold to investors - would be seized and placed under temporary control in one of the largest government bailouts ever. The move is expected before Asian markets open Monday, which is Sunday night on the U.S. East Coast.
McCain’s campaign on Saturday called for the eventual elimination of Fannie and Freddie, complaining they have become so large and poorly managed that they pose a risk to the broader financial markets.
Senator McCain will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government,” said Doug Holtz-Eakin, a senior McCain policy adviser.
Obama, too, has been critical, complaining that Fannie and Freddie should either operate as public entities without profit, or as private companies that won’t be rescued if they fall into trouble.
McCain’s running mate, Alaska Gov. Sarah Palin, speaking in Colorado Springs, Colo., said Fannie and Freddie had “gotten too big and too expensive to the taxpayers.” The companies, however, aren’t taxpayer funded but operate as private companies. The takeover may result in a taxpayer bailout during reorganization.
As explained to the campaigns, Fannie and Freddie would be placed under the control of their regulator, the new Federal Housing Finance Agency. This agency was created when President Bush signed legislation on July 30 replacing the prior regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight.
The new agency has greater powers and the authority to manage the two entities if they are placed under government control. Treasury hopes the action will stabilize credit markets, give banks incentive to do more mortgage lending and bring down mortgage rates by reducing the gap between mortgage rates and longer-term Treasury bonds.
“It should bring mortgage rates down, because Fannie and Freddie are now (after the takeover) like Treasury debt,” said Mark Zandi, chief economist for forecaster Moody’s Economy.com.
Rates on a 30-year fixed mortgage could come down to between 5.25 percent and 5.5 percent, he said, and world financial markets should respond favorably on Monday.
“Fannie and Freddie were a significant cloud over the market that presumably has been lifted,” he said. “I think investors should respond positively.”
The government takeover process is called conservatorship, and it works sort of like a Chapter 11 bankruptcy, where assets are preserved, not sold off, and the company is reorganized rather than closed.
The coming takeover was also confirmed Saturday by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. In a Saturday afternoon statement, Frank confirmed that he spoke late Friday with Paulson and was told that Treasury “intends to use the powers that Congress provided it to ensure the continued and stable functioning of Fannie Mae and Freddie Mac.”