Fannie Mae and Freddie Mac play a central role in the U.S. mortgage market. Federal officials had hoped that the takeover of the companies would begin to bring some stability to the battered housing industry. They weren't disappointed.
The rate on the 30-year fixed mortgage fell by half a percentage point on Monday.
"This is definitely a positive step on Monday," says Bill Gross, who heads the powerful bond firm Pimco. "We'll see what happens going forward, but if the Treasury buys mortgages like they're promising to do, I would think that mortgage rates could come down even lower."
Nervous Investors
But the interest rate paid for Treasury bills went up — a sign that investors are nervous about the large debt burden the government is taking on. Throughout the financial markets there were just as many questions as answers today about the future of the two companies.
U.S. officials portrayed the takeover as temporary. But they also left no doubt they want to see a fundamental rethinking of how Fannie and Freddie operate. Among other things, they want to see the companies scale down their huge portfolios of mortgage-backed securities.
Christopher Whalen of Institutional Risk Analytics says that by amassing all these securities, the companies have grown richer and more powerful. But Whalen notes that Fannie and Freddie typically have to borrow to pay for them.
"So they're not adding anything to the marketplace," he says. "They're actually competing with private banks and investors for those dollars they borrowed. There's absolutely no purpose to it. It's simply to generate earnings for the public shareholders."
Back To Basics
Whalen says he'd like to see the companies return to the original mission of buying mortgages from lenders in an effort to make the housing market more liquid. But Jonathan Koppell, who directs the Millstein Center for Corporate Governance at Yale University, says any effort to alter the size or mission of the companies is bound to face opposition from Democrats in Washington.
"The congressional committees that oversee Fannie Mae and Freddie Mac have made it clear that they have a strong interest in seeing the companies perform this role of extending credit to as many Americans as possible," he says.
Already today there were some grumblings from Democratic congressional leaders about some parts of the Bush administration plan. Sen. Christopher Dodd of Connecticut, who chairs the Senate Banking Committee, was asked what the effort to reduce the companies' portfolios might mean for the overall housing market.
"That's a great question and it certainly ought to be one of the top five or six questions that get asked at our hearing," he says. "And I've had others in the private sector raise that question already."
The Risk Factor
Dodd says the important question for Congress to consider is not how big the companies' portfolios are, but how risky they are. And he says Fannie's and Freddie's investments have traditionally been safe.
One thing is certain: Deciding the companies' future will take some time. Although the Bush administration has made its preferences clear, the real fate of Fannie and Freddie will be in the hands of the next administration.
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