Saturday, August 18, 2012

U.S. Treasury Tightens Grip on Freddie Mac and Fannie Mae (FNMA, FMCC)

The U.S. government on Friday took steps to tighten its hold on the mortgage firms Freddie Mac (OTC:FMCC) and Fannie Mae (OTC:FNMA) to ensure that the two companies remained under its control and also to keep a strong grip on the housing sector in the country.

The U.S. Treasury said that the companies had to lower their investment portfolios faster and turn over their profits to taxpayers.

The two large mortgage players, which dominated the housing market in the United States prior to the housing bubble burst in 2007, sustained massive losses in that episode and had to be bailed out by the government, that eventually took control of them and their operations.

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The two firms buy mortgage portfolios from lenders and sell them to investors repackaged as securities. Prior to their becoming state-owned they paid a 10 percent dividend to the Treasury, often borrowing from the Treasury to make that payment.

Under the new terms of their existence, they will no longer be able to retain their profits. The changes would effectively make them government utilities.

 "That new institution will be such that it's not going to be a for-profit company. It's just going to generate enough revenue to operate," Lawrence Yun, Chief economist o the National Association of Realtors said.

After the government took over the running of the companies, it has infused about $188 billion into the two companies for their survival. From 2013 onwards the unlimited financial support extended by the Treasury so far will expire.

Fannie Mae's bailout package will be capped at $125 billion and that of Freddie Mac at $149 billion. Under the new policy with no obligation on them to make dividend payments, the two can concentrate on servicing their debt.

Shares of FMCC slumped 23.33% to $0.230 on Friday and FNMA lost 20% to $0.236.

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