Federal takeover of Fannie Mae and Freddie Mac: Difference between revisions

 

==Market consequences==

===Bank reserves===

Many commercial banks in the United States own Freddie and Fannie preferred shares. Those shares have had their dividends suspended, and are junior to the senior preferred stock issued to the Treasury in the restructuring of the two companies. The market value of the preferred shares plunged after the restructuring announcement and suspension of dividends. Banks were required to write down the value of Freddie and Fannie preferred stock held in their portfolios, compounding capitalization concerns for certain U.S. banks.<ref name = 'Bloomberg-Shen-2008-09-08'>

|url=http://www.mcclatchydc.com/2008/10/12/53802/private-sector-loans-not-fannie.html#ixzz12xTyWY91A

|date=2008-10-12

*Lower borrowing costs for banks typically increase the "spread" between the rate at which they borrow and which they lend. This increases bank profitability, shoring up bank liquidity and balance sheets further.

*Adjustable rate mortgage ([[Adjustable-rate mortgage|ARM]]) rates are reduced, which lowers pressure on homeowners and reduces foreclosures. Lower rates also encourage new home purchases.

The report notes the for-profit structure of the GSEs worked counter to prudent risk management as competition reduced both market share and profits, thus eroding the GSEs credit requirements. To maintain profitability, each Enterprise increased purchases of PLS backed by alternative mortgages and of high-risk whole loans. And while many had criticized the OFHEO and sought to replace it:

 

 

The [[Presidency of George W. Bush|George W. Bush administration]] was prevented from taking official action due to Senate Bill 190 of the 109 Congress never being allowed a full Senate vote, even though it was passed out of committee on a 13-9 vote along party lines (13 Republicans voted "Yes" and 9 Democrats voted "No"),<ref>{{cite web|url=http://www.govtrack.us/congress/bill.xpd?bill=s109-190|title=Federal Housing Enterprise Regulatory Reform Act of 2005 (2005 - S. 190)|author=|date=|work=govtrack.us|access-date=January 23, 2017}}</ref> doing so would have prevented Congress' home ownership goals being realized. On June 16, 2010, it was announced that the two GSEs would have their shares delisted from the NYSE.<ref>{{cite web | title = Fannie Mae, Freddie Mac to delist from NYSE | author = Chris Isidore | url = http://money.cnn.com/2010/06/16/news/fannie_freddie_delisting/ | website = CNN Money | date = June 16, 2010 | access-date =June 19, 2010 }}</ref> An article from August 2012 in ''Bloomberg'' noted that the companies "have drawn $190 billion in aid and paid $46 billion in dividends since being taken over by U.S. regulators in 2008".<ref>{{cite news | title = U.S. Revises Payment Terms for Fannie Mae, Freddie Mac |author1=Cheyenne Hopkins |author2=Clea Benson | url = https://www.bloomberg.com/news/2012-08-17/treasury-accelerates-withdrawal-of-fannie-freddie-backing.html | publisher = Bloomberg | date = August 17, 2012 | access-date = October 4, 2012 }}</ref> CBS News reported on August 6, 2015, that Fannie Mae alone has paid a total of $142.5 billion in dividends since receiving a bailout of $116 billion in 2008.<ref>{{cite news | title = Fannie Mae posts $4.6B profit; paying $4.4B dividend | url = http://www.cbsnews.com/news/fannie-mae-posts-4-6b-profit-paying-4-4b-dividend/ | publisher = Associated Press | date = August 6, 2015 | access-date = January 8, 2016}}</ref> On September 24, 2012, a judge dismissed a class-action lawsuit that contended that Freddie Mac made misleading statements about its exposure to risky loans in the run-up to the company's federal takeover.<ref>{{cite news | title = Securities Fraud Lawsuit Dismissed Against Freddie Mac | author = Alan Zibel | url = https://www.wsj.com/articles/SB10000872396390443328404578022640377038654 | work = Wall Street Journal | date = September 27, 2012 | access-date = October 5, 2012 }}</ref> As of 2018, profits from Fannie Mae and Freddie Mac are still being sent to the Treasury Department.