Fannie Mae (FNM) and Freddie Mac (FRE) are about to get less strict capital rules and that should put $200 billion into the mortgage market. According to Reuters "Under the agreed-to plan, the two companies will be permitted to use some of their capital reserves to soak up mortgage assets while pledging to raise equity capital — probably in the form of preferred stock — in the near future."
The program has the merit of helping stabilize the secondary mortgage market which has been bloodied by the drop in value of financial derivatives based on home loans.
The idea behind the new plan has plenty of benefit for an Administration that wants to being some calm to the markets. but it only addresses half of the problem. Fannie Mae and Freddie Mac are losing billions of dollars because of home foreclosures. While they may be able to put more capital into the market, there is nothing in place to keep them solvent if their red ink keeps piling up.
Solving a piece of the trouble does not do much good, at least longer-term. The two companies cannot do help rescue the mortgage markets if their own financial status begins to collapse.
Douglas A. McIntyre
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