The only thing you read this weekend was the Styles section. The only television you watched: the VMAs. Hey, that's what weekends are for. Unless you're Treasury Secretary Hank Paulson. He had a crap weekend: "I've never been through any situation which was as difficult, as stressful, as complex," he told Bloomberg TV today.
No idea what he's talking about? Yeah. That's what happens when news breaks on the weekends, and dealing with the avalanche of reports that follow a weekend announcement such as "The government is basically taking over the mortgage industry in a desperate attempt to save America" in addition to your usual Monday duties is a headache. Which is why, to get you caught up, Intel has compiled a short summary about what went down with mortgage giants Fannie Mae and Freddie Mac while you were brunching.
Wait, So What Happened? Treasury Secretary Henry Paulson announced plans yesterday to take over Fannie Mae and Freddie Mac. As we once told you, FNMA and FRE are not troubled farm children, but are in fact two giant mortgage lenders that were started by the government, went public, and then over the past year spun into total chaos and disarray as the mortgage market seized up over the subprime crisis. Back in July, the Fed offered them some money to solve their problems, but that didn't work out, and so now they've just decided to go whole-hog and bail them out. From now until, well, whenever, the federal government will ensure Fannie and Freddie have the capital to continue doing what they do (funding mortgages) and will guarantee repayment of the bonds and other forms of debt issued by them. Isn't that nice? It is … sort of.
Wait, How Exactly Do They Plan On Doing That? For starters, the Treasury Department has agreed to acquire $1 billion of preferred shares in each company and has pledged to provide as much as $200 billion to them as they are getting their acts together.
But they're not going to trust that money with just anyone. So they've replaced the companies' CEOs — the guys who led the firms into risky investments and failed to react swiftly during the first rumblings of the subprime-mortgage meltdown — with new ones: Herbert M. Allison Jr., the former head of retirement-plan manager TIAA-CREF and the finance adviser on John McCain's 2000 campaign, will take over at Fannie; and David M. Moffett, a former Carlyle Group executive and vice-chairman of U.S. Bancorp, will take the reins at Freddie.
They, in turn, will be managed by the Federal Housing Finance Agency, which will make sure that they (a) don't make risky investments like the last dudes did and (b) will stay true to the companies' original mission of providing affordable loans to would-be homeowners.
Why This Is Good: Combined, Fannie and Freddie own more than $5 trillion of debt (including about 75 percent of mortgages) and have issued mortgage-backed securities to central banks and other investors worldwide, so the failure of either of them, as Paulson said yesterday, "would cause great turmoil in our financial markets here at home and around the globe." So it's good for the stock market, basically, because it's not horribly bad. The deal is also good for the consumer because mortgage rates will go down a little, or at least stabilize. And Paulson said yesterday that one of the things the new Fannie and Freddie will do is examine the fees they charge banks for loan securitization services “with an eye toward mortgage affordability,” and a reduction in those fees would be passed onto the consumer. If you already have a fixed-income mortgage, this doesn't help you much. However, if you're about to be foreclosed upon, the New Guard may make it easier for you to renegotiate for a cheaper loan.
Why It's Bad: Well, where is the Fed getting all this money? Us. We mean, not us personally, but also, yes, us personally. We are paying with the taxes eked from our pathetic miserable paychecks for this because a bunch of dickbag lenders encouraged a bunch of irresponsible borrowers to borrow money they couldn't pay back. Plus, if you are a shareholder or invest at all in mutual funds, you probably lost a bunch of money on Fannie and Freddie, which were formerly seen as "safe" investments. Boo. But then, it's better than total world poverty, so we guess we're for it. We're saintly like that. As long as it, you know, works.
Some other places where this is all explained better:
U.S. Seizes Mortgage Giants [WSJ]
Paulson Says Fannie, Freddie Crisis 'All Consuming" [Bloomberg]
Stock Markets Soar After Fannie/Freddie Bailouts [WP]
Fannie, Freddie, and You [NYT]