The U.S. Treasury announced late last week that it would offer significant new financial support to the stressed mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), notwithstanding their performances for the next 3 years. This move by the Fed follows the recent repayment of bailout money by the nation’s biggest financial institutions.
To keep Fannie Mae and Freddie Mac afloat, the Treasury has removed the $200 billion caps on the capital availability of both companies. Already, taxpayers have provided $111 billion to them. According to the Treasury, losses for Fannie Mae and Freddie Mac are not expected to exceed the government’s estimate of $170 billion over 10 years.
Uncapped access to bailout funds through 2012 is necessary to protect the strength and stability of the U.S. mortgage market, the Treasury said. Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.5 trillion — about half of all mortgages.
Amid increasing concerns that Fannie and Freddie did not have enough capital to withstand losses on their portfolio, the government ultimately announced the takeover of these companies to prevent a collapse last year. However, as expected, the biggest losers were the shareholders of these companies.
Finally, Fannie Mae and Freddie Mac were placed under the conservatorship of Federal Housing Finance Agency (FHFA). Under the conservatorship, Fannie and Freddie no longer manage a strategy to maximize common shareholder returns and the Conservator has eliminated common and preferred stock dividends (other than dividends on the senior preferred stock). However, since then they have provided most of the liquidity in the mortgage market, allowing homeowners to refinance and buy new homes.
With the move to support Fannie Mae and Freddie Mac in the long-term, the government has ultimately transformed them into its arms, making them take active part in its mortgage modification programs.
The companies disclosed on Thursday that their chief executives received $6 million as annual compensation as the mortgage giants try to attract and retain talent to support the U.S. mortgage market. The packages were approved by the Treasury and FHFA.
Fannie Mae and Freddie Mac have been among the firms hardest hit by the housing slump, credit crisis and ongoing recession. We anticipate losses to increase in the coming quarters and the conservatorship to continue for a long time, and thus see no value for the common shareholders.
However, we do foresee Fannie Mae and Freddie Mac’s increased participation in the Making Home Affordable Program, potentially lowering losses from foreclosures in the upcoming quarters.
Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
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