GSEs to Buy $40 Billion in Troubled Mortgages Monthly

October 13, 2008 No Comments »

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Mortgage financiers Fannie Mae and Freddie Mac are gearing up to buy a combined $40 billion in “underperforming mortgage bonds” each month, according to a Bloomberg report.

Citing unnamed sources familiar with the plan, Bloomberg said the move is part of a wider strategy by the U.S. government to eradicate bad mortgage debt from the financial system, but separate from the $700 billion Troubled Asset Relief Program (TARP).

Each company will be expected to buy $20 billion in subprime, Alt-A, and non-performing prime mortgage securities per month to help keep credit flowing and interest rates down (which recently spiked).

After the government-sponsored entities came under government conservatorship back in early September, the Treasury said the pair would ramp up their MBS portfolios until 2010, and then gradually reduce inventory through natural runoff at a clip of 10 percent annually.

At that time, the Treasury also established a secured lending facility for the GSEs and said it would initiate a temporary program to purchase GSE MBS.

Prior to the takeover, the two companies were actively reducing mortgage holdings as they struggled with record losses and capital constraints.

Late last week, OFHEO director James B. Lockhart classified the pair as “undercapitalized” as of the end of the second quarter, but announced it was scrapping capital classifications during conservatorship to ease pressure on the ailing GSEs and related credit markets.

Fannie and Freddie already own or guarantee about half of the $12 trillion residential mortgage market.

(photo: squeakymarmot)

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