In a massive action to keep the housing market on government life support, the Treasury Department pledged to provide unlimited financial assistance to the largest insurers of home mortgages, troubled Fannie Mae and Freddie Mac.
The move, announced on Christmas Eve with members of Congress already on their way home out of Washington, D.C. for the holidays eliminates the current $400-billion emergency cap without permission of Congress. Members of the key Financial Services Committee criticized Treasury Secretary Tim Geithner in public hearings and one member even called for his resignation.
The Obama administration, facing stiff Republican opposition to further bail-outs made the announcement through the Treasury Department. The program that Treasury established to support the mortgage market by purchasing mortgage-backed securities (MBS) would have ended December 31st. The Treasury Department anticipates that it will have purchased about $220-billion of securities since it was originated in response to the financial crisis to aid the housing market.
“The amendments to these agreements announced today 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 Department said in a statement.
Neither Fannie or Freddie are near the $200-billion limit each institution currently has for the program, having used $111-billion of funds mainly to provide pay-offs on mortgages underwritten on foreclosures. However, $900-billion per institution has been mandated to cover losses on foreclosed properties, which totals $1.8-trillion. The huge expansion of the program comes amid rising foreclosures expected in the early part of the New Year as more homeowners walk away from properties they have little or no equity in.
The action comes after reports that existing home sales for November hit their highest level in almost three years pushed by the government’s first time home buyers’ tax credit, near record low mortgage rates and lower home prices. The decline in existing home prices has led to a deflationary spiral in many of the worst affected markets, but shows promises of improvement in some housing markets.
Despite public outcries against large bonuses paid to financial industry executives, Fannie Mae and Freddie Mac disclosed at the same time they had received permission from the government to pay $42-million in bonuses to 12 top executives for 2009. The Wall Street style compensation approvals have been made despite the fact that the government never expects a refund of monies made to the government sponsored companies.
The Treasury Department’s announcement also included an important side note on the housing market. “The Administration is in the process of reviewing issues around longer term reform of the federal government’s role in the housing market,” the statement said. It was the first time that the government openly stated that it would be formulating a plan to address the housing crisis. More than 5-million homes have been foreclosed since the crisis began and another 12-million properties are at risk of foreclosure.
“We expect to provide a preliminary report around the time President Obama releases his fiscal 2011 budget in February 2010. Recent announcements on the tightening of underwriting standards by Fannie Mae, Freddie Mac, and the Federal Housing Administration, demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance.”