The US Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance.
The two companies, the largest sources of mortgage financing in the US, are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under a new agreement announced on Thursday, these limits can rise as needed to cover net worth losses through 2012.
The Obama administration was “beginning to realise it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice-president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”
Foreclosure filings exceeded 300,000 in November for a ninth consecutive month, RealtyTrac Inc reported on December 10. The firm said filings would reach a record 3.9 million for the year.
Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury department officials said they didn’t expect the companies to need assistance beyond what was available under the current caps, barring significant deterioration in the economic outlook.
The announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in a statement in Washington.
Portfolio size
The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 per cent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 per cent a year.
This means they won’t need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.
“It does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary,” the Treasury said.
Fed programme
The change in the portfolio limits may ease investor concern that the companies could be forced to shrink their portfolios at the same time that the Federal Reserve ends its $1.25 trillion mortgage-bond purchase programme. That could have exacerbated pressure on mortgage rates caused by the end of the Fed program, Laurie Goodman, an analyst in New York at Amherst Securities Group LP, said this month.
The Treasury said it was ending its mortgage-backed security purchase programme as of December 31, after about $220 billion in purchases. The government also is eliminating a short-term credit facility for the two companies and the Federal Home Loan Banks that was never used.
Also yesterday, the companies disclosed in regulatory filings that Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr are each eligible for compensation of as much as $6 million this year.
Executive pay
Pay at the mortgage-finance companies, which were seized by the US in September 2008, added to debate over salaries for executives at companies dependent on government bailouts. Compensation must be sufficiently high to “attract and retain” top talent, their regulator, the Federal Housing Finance Agency, said in a statement.
In addition to the CEO pay, 10 additional executives at the two companies are eligible collectively for $30.1 million in compensation for this year. Overall, pay for top executives of the mortgage-finance companies is down 40 percent from before they were seized, the regulator said.
Brian Faith, a Fannie Mae spokesman, and Michael Cosgrove, a Freddie Mac spokesman, declined to comment on the executive compensation and didn’t immediately return messages on the later Treasury announcement.
