The two largest mortgage finance companies in the US, Fannie Mae and Freddie Mac have been taken over by the US government in an effort to become the most expensive financial bailout in US history. ..no sorry, that’s not the underlying goal.. They’ve been taken over because they were ‘too big to fail’ – their collapse would have caused turmoil in financial markets in the US and around the world.
No final word on how much this bail-out will cost American tax payers, but the rough estimate of $25 billion has been called ‘too optomistic’.
The plan also commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost. It bans them from lobbying the government, putting an end to their ability to use their political machine on Capitol Hill.
It also eliminates dividend payments to current shareholders while protecting the principal and interest payments on the debt, now held by foreign central banks, financial institutions, pensions funds and others.
The Treasury will force both companies to shrink their portfolios over the long term; they now hold or guarantee about half of the country’s mortgages. In addition, the government plans to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of $5 billion worth this month. This step, never before undertaken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages.
In Canada the CMHC has taken steps to try to minimize speculation and the risk of bubble markets by eliminating the insurance of zero down and fourty year mortgages introduced a couple of years ago. Have these barndoors been closed too late? Will a collapsing housing market in Canada bring a taxpayer bailout of the CMHC?