On Wednesday, July 23, the House of Representatives is set to approve a bill aimed at alleviating the current housing crisis as well as rescuing FNMA & Freddie Mac, the two government sponsored enterprises (GSEs). Part of the bill will authorize Treasury Secretary Henry Paulson to bail out the two GSEs and place few restrictions on the two large mortgage finance providers.
Please click on the links below to go to the homepages of both FNMA and Freddie Mac.
http://www.freddiemac.com/
A previous obstacle to the success of the bill was the veto threat by the Bush administration due to the bills provision to provide $3.9 billion to communities for the purchase of foreclosed properties.
The bill appears to leave the two GSEs basically intact as autonomous organizations with few additional limitations which would have possibly harmed common shareholders. The bill does not impose any restrictions on the GSEs abilities to continue to pay dividends to shareholders. Also important is the point that the Treasury will not receive preferential treatment over other shareholders if it decides to inject capital into the GSEs through the purchase of preferred shares of the GSEs.
The bill does add provisions for a stronger regulator of the two GSEs as well as additional oversight. The Fed has already begun reviewing the books of the GSEs to verify their capital position and liquidity. One goal of the bill is to enhance the market's confidence in the GSEs. FNMA and Freddie Mac common stock is down 66% and 72% this year, respectively. The importance of the companies to the American financial system and economy as a whole cannot be overstated. With the collapse of the secondary market for morgages and Wall Street's inability and unwillingness to participate in its recovery, FNMA and Freddie Mac remain two of the few options for creating a market for mortgages, along with lesser known GNMA and FHA.
One pleasing aspect of the bill to both borrowers and lenders in high cost housing markets, such as the Bay Area, is the higher cap on loan amounts that will result. The new conforming loan limit would become $625,000, or the median home price plus 15%, for both FNMA and Freddie Mac.
A previous obstacle to the success of the bill was the veto threat by the Bush administration due to the bills provision to provide $3.9 billion to communities for the purchase of foreclosed properties.
The bill appears to leave the two GSEs basically intact as autonomous organizations with few additional limitations which would have possibly harmed common shareholders. The bill does not impose any restrictions on the GSEs abilities to continue to pay dividends to shareholders. Also important is the point that the Treasury will not receive preferential treatment over other shareholders if it decides to inject capital into the GSEs through the purchase of preferred shares of the GSEs.
The bill does add provisions for a stronger regulator of the two GSEs as well as additional oversight. The Fed has already begun reviewing the books of the GSEs to verify their capital position and liquidity. One goal of the bill is to enhance the market's confidence in the GSEs. FNMA and Freddie Mac common stock is down 66% and 72% this year, respectively. The importance of the companies to the American financial system and economy as a whole cannot be overstated. With the collapse of the secondary market for morgages and Wall Street's inability and unwillingness to participate in its recovery, FNMA and Freddie Mac remain two of the few options for creating a market for mortgages, along with lesser known GNMA and FHA.
One pleasing aspect of the bill to both borrowers and lenders in high cost housing markets, such as the Bay Area, is the higher cap on loan amounts that will result. The new conforming loan limit would become $625,000, or the median home price plus 15%, for both FNMA and Freddie Mac.
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