The Christmas present from Treasury - Wednesday, December 30

I didn't post this because I was taking some time away from the Markets, but this is highly important. I will also post a response that came out today which we should keep an eye on. First, the Christmas present to Freddie and Fanny (the big banks perhaps are the real winners in this). Remember too, it came out on Christmas eve. Around 8:00 if I remember right. Nice! From Bloomberg U.S. Treasury Ends Cap on Fannie, Freddie Lifeline for 3 Years By Rebecca Christie and Jody Shenn Dec. 25 (Bloomberg) -- The U.S. Treasury Department will remove the caps on aid to Fannie Mae and Freddie Mac for the next three years, to allay investor concerns that the companies will exhaust the available government assistance. The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under a new agreement announced yesterday, these limits can rise as needed to cover net worth losses through 2012. The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.” Foreclosure filings exceeded 300,000 in November for a ninth consecutive month, RealtyTrac Inc. reported Dec. 10. The firm said filings will reach a record 3.9 million for the year. Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion lifeline. Treasury Department officials said they didn’t expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook. Yesterday’s announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in a statement in Washington. Portfolio Size The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolios of mortgage assets. Previously, the companies were instructed to reduce their portfolios at a rate of 10 percent a year. Now, they will be required to keep the value of their portfolios below a maximum limit, currently $900 billion, that will go down by 10 percent a year. This means they won’t need to take immediate action to trim their holdings and could allow them to rise. Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies. “Treasury does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary,” the Treasury said. Fed Program The change in the portfolio limits may ease investor concern that the companies could be forced to shrink their portfolios at the same time that the Federal Reserve ends its $1.25 trillion mortgage-bond purchase program. That could have exacerbated pressure on mortgage rates caused by the end of the Fed program, Laurie Goodman, an analyst in New York at Amherst Securities Group LP, said this month. The Treasury said yesterday it is ending its mortgage- backed security purchase program as of Dec. 31, after about $220 billion in purchases. The government also is eliminating a short-term credit facility for the two companies and the Federal Home Loan Banks that was never used. Also yesterday, the companies disclosed in regulatory filings that Fannie Mae Chief Executive Officer Michael Williams and Freddie Mac CEO Charles Haldeman Jr. are each eligible for compensation of as much as $6 million this year. Executive Pay Pay at the mortgage-finance companies, which were seized by the U.S. in September 2008, added to debate over salaries for executives at companies dependent on government bailouts. Compensation must be sufficiently high to “attract and retain” top talent, their regulator, the Federal Housing Finance Agency, said in a statement. In addition to the CEO pay, 10 additional executives at the two companies are eligible collectively for $30.1 million in compensation for this year. Overall, pay for top executives of the mortgage-finance companies is down 40 percent from before they were seized, the regulator said. Brian Faith, a Fannie Mae spokesman, and Michael Cosgrove, a Freddie Mac spokesman, declined to comment on the executive compensation and didn’t immediately return messages on the later Treasury announcement. The Obama administration is still developing its long-term plan for Fannie Mae and Freddie Mac. In yesterday’s statement, the department said it expected to release a preliminary report on the companies as part of the 2011 budget, due in February. ‘Prudent’ Policy Recent announcements from the companies and the Federal Housing Administration “demonstrate a commitment to prudent housing finance policy that enables a transition to an environment where the private market is able to provide a larger source of mortgage finance,” the Treasury said. The Treasury and Federal Housing Finance Agency seized control of the mortgage-finance companies almost 16 months ago amid fears the two were at risk of failing. The government- sponsored enterprises, or GSEs, own or guarantee about $5.5 trillion of the $11.7 trillion in U.S. residential mortgage debt. Officials set up the Treasury lifelines, which were expanded in May, to keep the companies solvent. If the two firms exhaust that backstop, regulators will be required to place them into receivership. Treasury officials weren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview last week. GSE Losses Washington-based Fannie Mae has lost $120.5 billion over the past nine quarters and McLean, Virginia-based Freddie Mac has recorded $67.9 billion in cumulative losses over the past nine quarters amid a three-year housing slump. The companies are an integral part of President Barack Obama’s housing-relief plan and have been pushed by the government to help more homeowners renegotiate their mortgages to stay out of foreclosure. As part of yesterday’s announcements, made ahead of a Dec. 31 expiration of some of the Treasury’s authority, the department said it would delay setting certain fees connected with the assistance program until the end of next year. The Treasury also made technical changes that affect the definition of mortgage assets and other accounting issues. To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net; Last Updated: December 25, 2009 00:01 EST

---

Now we have a response from a congressmen. He at least admits there might be some back door shenanigans going on here. Kudo's to him for that, but I'll believe anything will happen when I see it. Don't hold your breath. From the WSJ By MICHAEL R. CRITTENDEN WASHINGTON -- The Treasury Department's surprise Christmas Eve move to uncap the potential aid to Fannie Mae and Freddie Mac should be investigated, lawmakers from both political parties said Wednesday. Rep. Dennis Kucinich (D., Ohio) said his congressional subcommittee plans to investigate Treasury's decision to lift the existing $400 billion cap on government cash available to the two firms. Separately, Reps. Scott Garrett (R., N.J.) and Spencer Bachus (R., Ala.) called for the House Financial Services Committee to hold a hearing on the matter. Mr. Kucinich, who chairs the domestic policy subcommittee on the House Oversight and Government Reform panel, said he is concerned about how the two government-controlled firms will use their new flexibility. "This cannot be used simply to purchase toxic assets at inflated prices, thus transferring the losses to the U.S. taxpayers and acting as a back door [Troubled Asset Relief Program]," Mr. Kucinich said in a statement released by his office. Messrs. Garrett and Bachus raised similar concerns in a letter to Rep. Barney Frank (D., Mass.), who chairs the Financial Services panel. The two GOP panel members decried what they called a "transparent attempt to hide the news from the American people" by announcing the news the day before a major holiday. "With hundreds of billions of taxpayer dollars committed to these two organizations and trillions of dollars in total taxpayer exposure, this level of oversight is plainly insufficient," the two wrote, referring to the lack of committee hearings on the two firms this year. In announcing the unlimited aid the Treasury stressed that it was trying to reassure investors in the firms' debt and wasn't predicting the two firms would need exceptional assistance from the government. Since seizing the firms last September the government has pumped $60 billion into Fannie Mae and $51 billion into Freddie Mac, well below the $200 billion limit for each firm that had been in place until last week. The unlimited assistance available to the two firms does give the government more flexibility to use them to help deal with the ongoing housing crisis, which has continued unabated amid a series of patchwork government programs that have failed to slow foreclosures. Mr. Kucinich said he wants to investigate what options policymakers have to deal with housing issues. "I want to determine whether Fannie and Freddie have a cohesive plan to buy up underperforming mortgages that remain on the books of the big banks, at appropriate prices, and undertake a massive reworking of the terms of the mortgages," he said in the statement. The aid announcement came the same day that the firms' regulator, the Federal Housing Finance Agency, approved multimillion-dollar pay packages for the companies' top executives. That decision has also provided fresh fodder for the companies' critics on Capitol Hill. Write to Michael R. Crittenden at michael.crittenden@dowjones.com