Treasury Policy Change

By Kenneth R. Harney, Realty Times

The Obama administration announced a blockbuster policy change over the holidays that didn't get a lot of press attention, but will affect the housing market for years.

The Treasury department said it is now committed to support Fannie Mae and Freddie Mac with as many billions of dollars as is necessary to get them through the next three years. There'll be no limit whatsoever anymore.

Previously the Treasury had limited its support to $200 billion apiece for the two formerly-private, now government-controlled, mortgage finance giants.

From here on, the Treasury said in its policy announcement, there will no “uncertainty about the (government's) commitment to support the firms as they continue to play a vital role in the housing market during the current crisis.”

Though some critics howled that the Obama administration is writing a blank check, the significance of the move for real estate is potentially huge, for several reasons.

Number one: Fannie and Freddie provide funding for well over half the U.S. mortgage market -- making home sales and purchases possible for hundreds of thousands of consumers.

Number two: The fact that the two companies have an explicit, full faith and credit backstop from the U.S. Treasury means that Fannie and Freddie can borrow in the capital markets at more favorable rates. Those lower costs of capital can then be passed along - at least in part - to home loan borrowers in the form of lower interest rates.

Finally, a key reason for the policy change - which also included permission for the firms to retain larger mortgage-asset portfolios - is to help Fannie and Freddie provide deeper loan modification assistance to greater numbers of seriously troubled borrowers.

Both companies are now expected to reach out and offer loan principal forgiveness to delinquent and underwater home owners - something that the current Obama loan modification program does not permit.

Partly as a result, Obama's “Home Affordable Modification Program,” or “HAMP,” has been only minimally successful in attracting the participation of borrowers in the deepest trouble - especially those so far behind and underwater that they are walking away from their houses, sending back the keys to their lenders - and ultimately losses to Fannie and Freddie.

If the revised policy helps keep larger numbers of home owners out of foreclosure and out of walkaway mode, the impact on local real estate markets and home values could be significant over the coming couple of years.