New Housing Initiative Insures Freddie and Fannie's Survival

Includes: FMCC, FNMA, IYR
by: Bruce Krasting

On a day when Keefe, Bruyette & Woods (KBW) pronounced the inevitable death of Fannie (FNM) and Freddie (FRE), the Administration announced a new initiative that insures that Fannie and Freddie will be around for a long time to come. I’m confused to say the least.

The plan revealed Monday by Treasury, HUD and FHFA is to provide assistance for first time home buyers and existing borrowers who are unable to afford their current mortgage. Some observations:

-I have not seen a joint announcement like this before. I read this to be a first step toward consolidating the very separate roles and standings of FHFA and HUD. This effort to stimulate housing is very much a team effort.

-The initiative will be directed through HFAs. These are State and Local housing and finance agencies. Heretofore these HFAs have not had a significant percentage of the total mortgage pie. It would appear that this is another example of “outsourcing.”

-Mr. Geithner said of the plan, “ will help stabilize the housing market overall.”
Mr. Donovan the head of HUD said, “it will help in getting our housing market back on track.”

The Administration is directing its effort at the lower end of the housing market. For political and economic reasons this is the only segment of the market they can influence. That makes it the only right choice. The Administration has introduced the “Trickle Up’ theory.

-Senator Isakson (R. Ga) has been a strong sponsor of legislation that would expand the existing tax cut for first time buyers. That legislation may be trumped by the decision announced Monday. That remains to be seen. But if it turns out that way, it will be a window into just how political the Agencies are.

-Both Fannie Mae and Freddie Mac will play a critical role in this effort. They are both going to be bankers for the HFAs, “F/F will provide credit and liquidity facilities (to the HFAs)”. In addition, “the HFAs will issue mortgage bonds that Fannie and Freddie will bundle and Treasury will purchase them”. That’s right. Treasury will purchase the paper that comes from this. There are some restrictions but be assured this is going to happen as described. This is intergovernmental debt. It will not show up on a budget.

I thought it was interesting that F/F are going to be providing these services. It is a perfect role for them. But, it does make it a bit more difficult to declare them bankrupt and toast the stock as KBW suggests. This does not mean that the equity has value; it just means that the road to zero will be bumpy.