Capital Commitment Puts Fixing GSEs On Hold

By providing Fannie Mae and Freddie Mac with unlimited capital support over the next three years, the Obama administration can delay fixing the GSEs and use them to pursue more aggressive loan modification programs, according to Washington observers. Keefe, Bruyette & Woods equity analyst Bose George noted that it was unlikely loan losses sparked the Treasury Department's decision to increase its $400 billion commitment to keep Fannie and Freddie operating with positive net worth. "Given this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedowns as part of an enhanced Home Affordable Modification Program," Mr. George says in an "Industry Update" to clients. Federal Financial Analytics points out that the Treasury Department's December 24 statement on the GSEs allows Fannie and Freddie to maintain their large mortgage investment portfolios for another year. Treasury also put any end to expectations that the administration would unveil its plan for restructuring the GSEs in early February as part of the President's budget proposal for fiscal year 2011. "Now we are told only a preliminary plan will come 'around the time' of the budget," FFA analysts said.