What Fannie-Freddie Bailout Means to Tax Payers


On Sunday, the U.S. government seized control Fannie Mae (FNM) and Freddie Mac (FRE) , the two largest mortgage entities, in an attempt to stabilize the real estate market.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," said Henry Paulson, the Treasury Secretary.

We spoke with real estate professor Mark Goldman, of San Diego State University, about what this means for the average tax payer.

How much are tax payers going to have to cover in losses?

Even though taxpayers are exposed to anywhere from $ 50 to $500 billion [in potential liabilities], most estimates are [around] $100 billion, [and] the consequences to not helping could be significantly higher.

What happens next?

The two mortgage backers will get a line of credit [from the Treasury for] and are expected to draw an estimated $50 to $100 billion to cover their operating losses and to maintain capital. What’s going to happen is that Fannie Mae and Freddie Mac are obligated to pay for use of this capital. Fannie and Freddie are obligated to pay 10% plus other additional fees to the Treasury. In addition, the government will have warrants to acquire as much as 79.9% [of these entities]. The conservator has suspended dividends on the preferred stocks. Many financial institutions were encouraged to hold Fannie and Freddie preferred stocks for liquidity requirements. If those stocks are allowed to deteriorate, the capital reserves of many financial institutions would be jeopardized, which would reduce the stability of financial institutions and severely reduce the amount of capital they can lend.

How can this affect home buyers in a positive way?

The interest on mortgage backed securities has decreased significantly which means, interest rates on home loans have gone down. Today’s trading of mortgage backed securities is approaching the levels of a twelve month high, which means interest rates are approaching a twelve month low. That will make mortgages more affordable to more people. It brings money into the mortgage market that lenders can borrow. It brings more capital to Fannie and Freddie. This helps to stabilize that source of funding for a couple of years, and to reduce interest rates that consumers will pay.

Can we expect fewer foreclosures as a result?

The simple answer is yes. But this is quite marginal. It will support housing prices by stabilizing the availability of more affordable mortgages. It’s going to reduce the negative factors that are affecting the real estate market. One of the problems that exist in many housing markets is that values are low in comparison to mortgage loan balances, which prohibit many homeowners from refinancing out of more expensive loans. Hopefully this measure will allow more people to be able to refinance into more affordable mortgages.

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