Last night, U.S. Treasury secretary unveiled a plan to aid struggling mortgage financiers Fannie Mae and Freddie Mac, both of which have taken a recent pummeling on Wall Street amid rising capitalization concerns.

The government-sponsored enterprises, deemed too important to fail, are the focus of a three-pronged strategy aimed at addressing the immediate liquidity and capital needs, as well as ensuring the firm’s solvency going forward.

First: Fannie and Freddie will be granted a temporary increase in the lines of credit they hold with the Treasury department. Currently each is able to borrow $2.25 billion directly from the Fed.

Second, the Treasury will be able to buy equity in either of the two companies to ensure they have sufficient capital.

Third: the Federal Reserve will take on a consultancy role in setting capital requirements and other safety standards as part of their regulatory reform legislation which is currently moving through Congress.

Fannie and Freddie either own or guarantee nearly half of all the country’s mortgage debt, an amount equal to some $12 trillion. By providing a source of funding on the secondary market, the two companies are crucial to the ongoing business of mortgage lenders.

In the aftermath of last year’s credit crisis, Fannie and Freddie are the only major players in packaging mortgage loans into securities to be sold on the secondary market. Had either failed, the result would have been increased costs for mortgages as well additional limitations to their availability.

Either would have had a drastic negative effect on housing prices and sales.

With the weight of the federal government firmly behind the GSEs, real estate investors can relax in knowing that there likely is no imminent collapse in a housing market which is suffering its worst recession in 25 years. While the real estate industry is hardly out of the woods yet, at least the worst has been taken off the table for now.

We’d love to be your real estate closing attorneys in Atlanta. Want to know more? Contact us and we’ll be happy to discuss how Harlan and Associates can be of service to you!

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