The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.
The Treasury Department said yesterday that it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the two, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.
Treasury Department officials said they will now use a flexible formula to ensure that the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.
By making the change before the end of the year, the Treasury Department sidestepped the need for an OK from a bailout-weary Congress. But the timing of the announcement on a traditionally slow news day raised eyebrows.
"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."
Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.
The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The Treasury said its latest move could allow Fannie and Freddie to play a bigger role in restructuring mortgages for troubled borrowers.
Treasury Department officials will provide an updated estimate for Fannie and Freddie losses in February when President Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.
The news followed an announcement yesterday that the chief executives of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.
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