Government Takeover of Fannie Mae and Freddie Mac
The following information was provided to me by Kenton Brown of Sente Mortgage.
Given the historic and unprecedented action by the US government this weekend in taking over Fannie Mae and Freddie Mac, I wanted to make sure you knew how this affects our business.
Fannie Mae and Freddie Mac are placed into conservatorship immediately. This amounts to a government take-over of the two companies.
To promote market stability, the companies will be allowed to buy more mortgages through the end of 2009. However, starting in 2010 the number of mortgages they own will gradually be reduced at a rate of 10% per year, eventually stabilizing at a much lower size.
The US Treasury will ensure that each company maintains positive net worth by buying their stock as well as providing a new lending facility to serve as an “ultimate liquidity backstop.” This facility will expire on December 31, 2009.
This morning, the companies are expected to resume normal business operations.
The U.S. government assumes control over the Board and management.
Current Fannie Mae and Freddie Mac CEOs are being replaced, but will stay on through a transition period.
There will be no dividends paid on preferred or common stock.
All lobbying/political activity by the companies will cease.
What does this all mean? These actions will provide stability to the market that many experts think will be the turning point in the housing crisis. Interest rates will fall (they already have this morning) and there will be plenty of money for mortgage financing. We may see a mini refinance boom as borrowers take advantage of rates we haven’t seen in a while. We will likely see some financing guideline changes in the future, but it is just too early to tell what these might be.
