Government Takeover of Fannie & Freddie

What is happening to Fannie and Freddie?

Major Points

• Fannie and Freddie have been placed in conservatorship. (Federal government has taken 79.9 percent of common stock and all dividends in return for buying $1 billion of preferred shares.)
• Treasury Department says both are open for business with no major changes in operations.
• Top Fannie/Freddie executives have been replaced.
• Fannie/Freddie can grow their guaranteed mortgage book with no limits and grow their retained portfolios with limits. Ultimately, the government plans to shrink their portfolios (10% per year starting in 2010).
• The federal government will provide capital to keep Fannie/Freddie’s net worth positive (up to $100 billion). In return, the Treasury will receive new senior preferred stock and warrants on the GSEs’ common stock.
• The federal government will begin buying Fannie/Freddie mortgage-backed securities (MBS) on the open market.
• Treasury Department will create a Secured Lending Credit Facility, a liquidity backstop for GSEs.
  

Initial Reactions

• Rates drop half a point!
• World markets respond positively to news: stocks up on Monday, September 8, 2008.
• Federal Reserve Chairman Ben Bernanke: “These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets.”
• Investor Warren Buffett: “Secretary Paulson has made exactly the right decision for the country. He is minimizing the problem of moral hazard and maximizing the benefits for the housing market and for the smooth functioning of financial markets.”
  

Anticipated Results

• Increased confidence in financial markets.
• Rates to possibly stabilize, due to reassurance given by government intervention.
• Loan term changes possible (FICO, LTV).
• More loan workouts possible due to increased government pressure on lenders to create solutions that prevent foreclosures.

Where Are Lenders Getting Credit Scores?

Consumers often mistakenly believe that mortgage lenders use only credit scores from Equifax, Experian, TransUnion, and Fair Isaac's myfico.com to gauge creditworthiness.

However, Consumer Reports recently found that lenders also use NextGen FICO scores, FICO Expansion Scores, and Industry Option FICO scores — which take car loans into consideration — as well as custom formulas.

Given that these credit scores or scoring models are not available to consumers, experts say that consumers should not rely solely on available credit scores to determine their likelihood of getting a loan. They would be wise to make timely bill payments, make more than the minimum payment, hold down credit card balances, and retain old accounts.

Additionally, experts say it might be worth keeping tabls on other credit scores, such as Experian's PLUS scores, which are not yet sold to lenders but could be in the future.

Source: Allentown Morning Call (PA) (09/02/08)