Fannie And Freddie: The Sky’s The Limit

Posted on Wed 12/30/2009 by

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By James Gattuso

While most of us were at home waiting for Santa and his reindeer to arrive, a gift arrived for mortgage giants Fannie Mae and Freddie Mac, as the Obama Administration lifted caps on how much bailout money they can receive from the U.S. Treasury. The old limits for the firms, both of which are under federal conservatorship, had been set at $200 billion each, though all concerned understood these were fictions. The new limits are… well, there are no new limits (which might be scored as a gain for transparency, at least). Moreover, requirements that the two shrink their portfolios were watered down.

It not entirely clear what spurred the Christmas Eve announcement. One bad scenario is that the move anticipates horrendously large losses by the two firms for the fourth quarter. Another is that the move was made to allow the twin firms to buy even more mortgages, further propping up the housing market. In other words, as support from TARP and by the Fed shrinks, Freddie and Fannie may – at least in part – take their place.

Of course it’s not like using the two firms as tools of economic policy is anything new. In a August financial statement, Fannie Mae described in unusually blunt terms what the Administration is asking of it, and what the financial effects were, stating:

…in addition to the investments we undertake to increase the supply of affordable housing, FHFA, as our conservator, and the Obama Administration have given us an important role in addressing housing and mortgage market conditions. …. Our financial results are likely to suffer, at least in the short term, as we expand our efforts to assist the mortgage market, thereby increasing the amount of funds that Treasury is required to provide to us and further limiting our ability to return to long-term profitability.

Officially, of course, Fannie and Freddie are still scheduled to reduce their portfolios over the next few years. And ideally, they should be wound down entirely. But, useful as they seem to be to the Obama Administration, don’t expect that to happen anytime soon.

James Gattuso contributes articles at The Heritage Foundation and is Senior Research Fellow in Regulatory Policy, Thomas A. Roe Institute for Economic Policy Studies

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