The United Stated Treasury Department will amend the terms of its bailout deal with Federal National Mortgage Association (OTC:FNMA) AKA Fannie Mae and Federal Home Loan Mortgage Corp (OTC:FMCC), commonly referred to as Freddie Mac, to expedite recovery, ensure the earnings generated by the mortgage giants will return to taxpayers, and reassure investors of the continues flow of mortgage credit.
Under the modified agreement, the Treasury Department required a speedy reduction of the investment portfolios of Federal National Mortgage Association (OTC:FNMA) and Freddie Mac, by increasing its annual rate from 10 percent to 15 percent. The new terms enables the firms to shrink their investment portfolios to $250 billion by 2018, four years ahead of the original schedule in the previous deal.
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Fannie Mae and Freddie Mac are also required to submit a yearly action plan to the Treasury Department, to reduce the exposure of taxpayers to mortgage credit risks in its guarantee book of business and retained investment portfolio.
Instead of paying 10 percent dividends to the Treasury in its preferred stock investments quarterly, all profits generated by the firms will be collected by the government every quarter to achieve its objective to reform and strengthen the financial housing market.
In a statement, Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy said, “We are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market. As we continue to work toward bipartisan housing finance reform, we are committed to putting in place measures right now that support continued access to mortgage credit for American families, promote a responsible transition, and protect taxpayer interests.”
Starting next year, the federal government’s financial support for the both firms will be limited. The bailout fund available for Fannie Mae is limited to $125 billion while Freddie Mac’s bailout money is limited to $149 billion.
In September 2008, the Bush Administration placed Fannie Mae and Freddie Mac under conservatorship to keep the firms from collapsing. The federal government infused $188 billion in taxpayer money to keep its business operations running. So far, the mortgage giants already paid the federal government approximately $46 billion through dividends.
During the second quarter of the fiscal year, Freddie Mac reported $2.9 billion income and $1.8 billion payment to the Treasury. Fannie Mae posted $5.1 billion income and returned $2.9 billion to the taxpayers.
The modified agreements do not have a great impact on the business operations of Fannie Mae and Freddie Mac, since both firms are showing signs of recovery. In addition, the Treasury Department ensures the availability of funds if they need it.
A previous report from Bloomberg cited the mortgage giants stepped up in selling back the bad home mortgages to lenders, including Bank of America Corp (NYSE:BAC), Wells Fargo & Company (NYSE:WFC), JP Morgan Chase (NYSE:JPM), and Citigroup (NYSE:C) among others. According to the report, the banks allocated a total of approximately $3 billion to repurchase the faulty home loans from Fannie Mae and Freddie Mac during the first half of 2012.
Wells Fargo & Company (NYSE:WFC) has the most to lose or gain. In 2008, Hank Paulson quickly changed his mind over what to do with the ‘twins.’ Wells Fargo is the largest lender in the country. Many of these loans are sold to Freddie Mac and Fannie Mae. If the Government decides to make different changes; i.e. some type of new housing plan, it could have a big impact on the giant lender. The Government seems confused about what to do with the Twins, which hold trillions of dollars of loans. The Government keeps changing its mind, any future change likely will hit Wells Fargo, since the Government would likely do something to hurt the bank and help home-owners, not vice-versa.