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Waiting on Fannie Mae and Freddie Mac

March 21th, 2010

Trying to establish order for Fannie Mae and Freddie Mac gets pushed back.

Washington took over Fannie Mae and Freddie Mac via the office of the Treasury just a little over a year ago, yet it has not had any discussions about their collective futures. The wait for those discussions could go as far as next year due to Congress' shift in focus to the overhaul of bank regulations.

It would seem that the best estimate for any action is sometime around the middle of year 2011. Trying to restore some stability to the financial markets in general has been the primary focus, therefore the mortgage giants will have to wait a little longer for their fate.

However, all of the waiting will only add fuel to the fire for the critics of the bailouts. After the Treasury assumed control of Fannie and Freddie, things did not improve. More loan losses and markdown of securities have led to billions of dollars of taxpayer support to be directed to the two entities to keep them afloat.

Critics worry about the possibility of another decrease in the economy in the coming year. Based on the fact that the firms possess or guarantee trillions of dollars worth of mortgages, a dip in the economy could significantly raise the additional amount needed by taxpayers.

But a quick fix is not on the horizon. Since the economy's turn for the worse, the aim of the federal response has been focused on making the housing market stable. Now that there are signs of a small, but weak, rebound, few people are willing to tamper with the companies that are predominantly the main supplier of mortgage dollars.

On March 23rd a hearing will be held by the House Financial Services Committee "to begin the process of considering the future of housing finance." according to Chairman Barney Frank. Treasury Secretary Tim Geithner has been invited by Frank to appear at the hearing.

Geitner's office has not stated if he will testify at the meeting. Yet, this meeting could give him a chance to lay out the administration's view on reshaping Fannie and Freddie as the economy moves forward.

Fannie and Freddie have come under fire previously, even before the bailouts. The conflict that exists between their stockholder owners and the government charter to support housing has often been the source of controversy.

The consensus to support housing with some of the bailout money seemed to ease the tension between the dueling interests, however the taxpayers are the ones paying the bill.

Even though the takeover was not a big hit with everyone, it did allow time to pass. During the passing of time mortgage interest rates have remained low. This allowed home purchases to stay at a level of affordability for a lot of people, which helped lower the amount of harm caused by the housing bust. Just this week Freddie Mac announced their 30-year mortgage commitment rate was less than 5%.

The Federal Reserve has announced their intention to end the purchasing of mortgages as of this month. Economic experts feel that this move will increase rates throughout the duration of 2010, causing home prices to drop again.

FHA Loans, which assist with low down payments, low closing costs, and easy credit qualification for purchasing a home are available now in all fifty states.

The dividends that are due to the Treasury on money received through the bailout is not sustainable according to some analysts at Standard & Poor. At this time, Fannie and Freddie are both expected to continue their losses, yet they are due to pay $7.6 billion and $5 billion, respectively, to the Treasury.

Just as the case with AIG and GMAC, if the companies cash flow is severely tightened, the government could modify the terms to allow the payback to be an easier pill to swallow.

Without clarification, Frank said in January he thought the companies should be abolished. Now he has added to the confusion with his statement that the government must keep open the option of making the companies creditors share in their losses.

The combination of these events would certainly decrease the companies' already low level of popularity with lawmakers and the general public. Both of these groups have already complained enough each time the companies request more funds after another dismal quarter performance reports are issued.

Given all the negatives, no one is sure what would replace the companies. A few have argued to completely nationalize them, while others feel the companies should be turned into public utilities, and yet a different group favors separating them in the fashion of AT&T and the Baby Bells.Based on the tight purse strings at banks who still are not in the mood to lend, coupled with investors still worried about any type of risk, it would seem that a noteworthy change is still off in the future.Federal Government agencies however are now qualifying VA Loans for those returning from tours of service and active soldiers. VA loans can be obtained for both first and second mortgages.

And that could be a positive. Over the past year Congress has dealt with bank reform during which time multiple stories have surfaced about the overpaid bankers and the culture of Wall Street.

Yet the banks have been successful in their attempts to prevent the reining of derivatives trading and the creation of some type of stand alone consumer financial products overseer.

"You look at all the work they have to do on regulatory reform, and you wonder how anyone can say fixing Fannie and Freddie is urgent," said Zigas. "What's the big rush?"

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