Fannie Mae and Freddie Mac are starting to limp back to health, but Treasury Secretary Timothy Geithner is still serious about reducing their role in the market. Image from Wikimedia Commons.

Troubled mortgage insurers Fannie Mae and Freddie Mac are starting to creep back toward solvency. The federal government has lent both houses more than $130 billion since Fannie and Freddie were placed under conservatorship in 2008. However, a new round of foreclosures is on the horizon, and that may undo any progress that has been made.

Losses slow as Freddie and Fannie get houses in order

Freddie Mac and Fannie Mae were one of the largest recipients of emergency loans during the federal bailouts of the past several years. Both mortgage houses received a combined sum of more than $130 billion to keep the real estate market afloat. However, the two toxic companies are starting to hemorrhage less money, according to ABC. During the last quarter of 2010, the period from October to December, Fannie Mae posted a loss of only $2.1 billion and Freddie Mac posted a loss of only $1.7 billion. In the same period of 2009, Fannie posted a $16.3 billion loss and Freddie posted a $7.8 billion loss. However, Fannie and Freddie have both requested additional loans, with Fannie asking for a further $2.6 billion and Freddie seeking another $500 million.

Plans to wind down the mortgage giants

For decades, Fannie Mae and Freddie Mac have played a crucial role in the real estate industry. The two companies purchase mortgages and resell them as investments in order to free up capital for loan lenders to lend more mortgages. However, the government is serious about drastically reducing Fannie and Freddie’s involvement in the mortgage market, including possibly phasing them out altogether. Treasury Secretary Timothy Geithner has admonished Congress to have a serious plan ready before trying to vote on anything, according to USA Today. Geithner cautioned House Republicans eager to cut the programs that doing so could have an adverse effect on the real estate market, including possibly destabilizing the housing finance industry entirely. Geithner has recommended a gradual program as the best course.

Darkest before dawn

Fannie and Freddie are both expected to endure further damage in coming months. Though Fannie and Freddie own roughly 50 percent of all mortgages in the United States, and 90 percent of all mortgages originated in the past few years, there is a growing backlog of foreclosures that cannot be completed until foreclosure reforms related to the “robo-signing” scandal are resolved. Whatever reforms take place regarding Fannie and Freddie, Treasury Secretary Geithner expects housing prices to rise a little bit over the next few years, according to Reuters. He also recommended that given housing conditions over the past few years, home buyers put larger amounts of cash down to ensure greater stability.

Sources

ABC

USA Today

Reuters

File photo of Gene Sperling. (Photo Credit: CC BY-ND/Center for American Progress/Flickr)

To fill the void left by controversial (and recently resigned) Lawrence Summers, President Obama has named Gene Sperling as the new director of the administration’s National Economic Council. The Huffington Post calls Sperling a “veteran policy and political player.” Considering the divided nature of the current Congress, experts predict Gene Sperling will have difficult economic policy work ahead.

Gene Sperling will watch unemployment, budget and deficit

The challenges Gene Sperling, 52, will face in his position as head of the NEC will be made none the easier by a divided Congress and an Obama administration that is currently in the middle of major shake-ups. However, the December jobs report – where unemployment is down to 9.4 percent, the lowest figure since May 2009 – could shed some positive light on Sperling’s road ahead.

Once he takes hold of the reins of his new office, Gene Sperling will be charged with accelerating the U.S. economic recovery, which will include deflating the still-daunting unemployment figures. By the time President Obama is in full re-election mode for 2012, Sperling will be waist-deep in the economic policies the president plans to feature.

A pragmatic approach to policy

A former senior adviser to Treasury Secretary Timothy Geithner, Gene Sperling was deputy NEC director under former President Bill Clinton. In 1993, Sperling played a significant role in devising a deficit reduction bill. Sperling was also as an economic adviser to 2004 Democratic presidential nominee John Kerry.

According to the Huffington Post, Sperling is considered to be a man who not only knows economic policy, but can explain it in a very pragmatic fashion, whether it be in legislative or campaign environments. Sperling has also been noted for his work with Goldman Sachs to provide business education for women in developing countries.

Sources:

Huffington Post

Gene Sperling on how education will rebuild U.S. economy

Some people think the installment loans lent in the bailouts weren't worth it, but Treasury Secretary Tim Geithner disagrees. Image from Wikimedia Commons.

In the financial crisis of the last few years, billions of dollars in installment loans to huge firms were lent in bailouts. Many have preached loudly about the waste involved and corporate favoritism. However, it may not cost as much as some think.

Rage at installment loans to big business

In 2008, the financial world was in turmoil, and the government moved to get some installment loans out to head off a collapse. Billions were lent to banks and investment houses from New York, New York, to Kansas City, Missouri, and the largest domestic auto manufacturers were given some enormous advance cash bundles to keep them afloat. Conservatives and liberals alike have raged about the bailout loans, but Treasury Secretary Timothy Geithner thinks the outrage is unfairly directed his way, according to the New York Times. Though officials, of course, don’t go out of their way to agree with their critics, he has a point.

Emergency loans could turn a profit

The emergency loans made to huge businesses could be justified. Geithner has maintained that the $25 billion estimated as losses by the Congressional Budget Office are estimates. He also has maintained losses will only come from bank loans and mortgages gone bad, but everything else will turn out. For instance, if the Treasury holds onto shares in GM and sells them over time, the loans GM received could eventually turn a profit on the long term. Citigroup, which received more than $45 billion in aid, turned a profit of more than $10 billion for the taxpayers already.

Proof will be in the pudding

Though it certainly seems ridiculous to only aid to the parties that created the economic problems in the first place when the people that have been hurt could use the help more, there may be an upside after the fact. If the profits realized from bailing out huge firms are more than the losses of bailing out Fannie and Freddie, then a rational basis for bailouts in dire straits will have appeared.

Sources

New York Times

Treasury Secretary Geithner in a meeting with President Obama. Image from Wikimedia Commons.

At a recent press conference, Treasury Secretary Timothy Geithner called for changes to be made to the way the mortgage market does business. He did not issue a hard and fast deadline. However, it is expected that he will tell Fannie Mae and Freddie Mac to get their houses in order within the next year. Geithner also made it clear that the U.S. cannot afford to have to bail them out again and that they were too aggressive in taking on risk.

Geithner unclear on how to proceed

As of now, there is no real plan in place for what to do about Freddie Mac and Fannie Mae. However, Geithner did make a few things perfectly clear. First, Fannie and Freddie will not be resuming business in the manner they were conducting it before the market meltdown. He also pinpointed irresponsible practices, including the two mortgage houses trying to take the bulk of the market from the private sector. He was adamant that the current mortgage industry, as it stands, is untenable, according to Reuters.

Little consensus on how to go about it

There is not much in the way of a consensus among industry insiders or economists on how to best reform the housing industry. Geithner did support retaining some of the government backing of mortgages, as the richest industrial nations all have something akin to Freddie and Fannie for insuring mortgages against loss. Some, such as Bill Gross, the co-founder of the Pacific Investment Management Co., argue full nationalization is necessary. According to Businessweek, the investment guru contended that the private market cannot make a comeback at this point.

Something has to be done regardless of strategy

Despite the wide range of opinions that exist about what to do about Fannie Mae and Freddie Mac, all agree something has to change. According to NPR, the government is already on the hook for $150 billion for the mortgage houses. For the first half of this year, 89 percent of all mortgages granted in America were backed by Freddie Mac, Fannie Mae and Ginnie Mae. Ginnie Mae, unlike Freddie and Fannie, is wholly part of the U.S. government, sells mortgage backed securities only if they meet specific standards and doesn’t lend mortgages.

Further Reading

Reuters

Business Week

NPR