A Safety Net Is Put in Place to Protect Fannie Mae and Freddie Mac

The government, over the weekend, has come up with a plan to assist both Fannie Mae and Freddie Mac in the wake of both corporations losing billions of dollars due to the rising number of American homeowners defaulting on their mortgages.

First, the Federal Reserve agreed to allow Fannie Mae and Freddie Mac, both of which are government sponsored entereprises (GSEs), to borrow directly from the fed. This was the same policy the fed extended to securities firms after the Bear Stearns crisis in March of this year. This would give both corporations the necessary liquidity to function uninterrupted as well as continue purchasing and insuring mortgages and expand their operations.

Second, the Administration will ask Congress to authorize the Treasury to lend both GSEs more money beyond their current limits and to buy stock in both companies. Third, the plan calls for the Federal Reserve to play a greater role in overseeing and regulating Fannie Mae and Freddie Mac.

There is no fear of a collapse of either corporation; however, some in the media have been capitalizing on the situation and have been working overtime to spread fear and uncertainty. Last Friday there was talk about the possibility of the two GSEs being nationalized. There was also a lot of buzz about a government bailout. However, the announcement yesterday about the government’s plan is nothing close to either nationalizing or a bailout.

Yet, the actions taken by the government were needed to reduce fears and increase confidence on Wall Street concerning the financial stability of both Fannie Mae and Freddie Mac. Late last week, investors, worried about the losses suffered by both companies, dumped the stocks and thereby caused stock prices of both to plunge to 17-year lows.

Treasury Secretary Henry Paulsen said: “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.”

Assistant Treasury Secretary Michelle Davis said: “This is basically a safety net. We do not expect to need to execute on either [the increased Treasury lending or the government stock purchase] immediately.”

While there are critics of the government’s plan, as can be viewed in today’s news, it was important that the Administration, Federal Reserve and Treasury restore calm and confidence to the financial markets and not allow this situation to have a broader impact upon the entire economy. Also, it can't be over-emphasized that such measures greatly assist going forward in helping our housing market and economy to recover and to restore consumer confidence in the real estate market.

Meanwhile on Capitol Hill, there isn’t much calm over this situation. Senator Christopher Dodd (D-Conn.), Chairman of the Senate Banking Committee, sharply criticized the White House by stating: “The administration’s failure to prevent bad lending practices has caused unprecedented hardship in the form of record foreclosures and market turmoil. Now, homeowners across the country and our entire financial system are suffering the consequences.”

I guess we will be debating for a very long time as to where to lay blame for our current situation. Frankly, I don't think any one person, agency, administration can be rightfully blamed. Rather, the problem or cause is systemic in nature. For right now the important thing is to lend strength where needed to ensure stability and to learn from our mistakes by putting measures in place to prevent this from ever happening again.