The Obama Administration designed plans for Federal Home Loan Mortgage Corp (OTCBB:FMCC) for the first time in last so many years. The Treasury official stated that Obama Administration won’t allow Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac to rebuild capital.
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The announcement was made by Dr. Michael Stegman during a speech at housing finance conference held by Goldman Sachs Group Inc (NYSE:GS). Stegman is a treasury counselor to the secretary for ‘Housing Finance Policy.’ His speech is, in essence, an unstated admission by the Obama Administration that legislation will go for reforms in housing-finance system. The speech also clarified that the administration had no plans of allowing the companies recapitalize. The statement dashed the hopes of investors.
Treasury Stegman said that he wants to remind both recapitalization of Federal Home and Federal National and draws versus the existing Treasury backstop because of potential future losses would cost taxpayers money. He pointed out that Federal Home and Fannie have a large credit line to draw in case their capital buffers run short.
The future ahead
Stegman discussed various steps that can be implemented by Freddie Mac and Fannie Mac in the future ahead. For instance, he said that the GSEs mortgage investment portfolio of large scale could be cut down more expeditiously. Federal Home and Fannie Mac have developed new forms of securities that they offer to private investors in order to mitigate their mortgage credit risk. Stegman said he would welcome such risk transfer activities.
The financial performance
Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie both posted poor dismal earnings for 4Q. Freddie reported earnings if $227 million while Fannie said it earned $1.3 billion. The GSE has to narrow down their capital buffers every year due to the deal with the Treasury. As of now, each GSE has capital buffer of $1.8 billion. The plans are to reduce it to zero by 2018.