On Christmas Eve the Obama administration exercised its right to increase the amount of aid it could provide to Fannie Mae and Freddie Mac without the permission of Congress by December 31, 2009. The administration vowed to back the mortgage giants for the next three years with tax payer money, no matter what the amount.

Fannie and Freddie  own or guarantee half of the nation’s $11 trillion in home mortgages. In conjunction with the Federal Housing Administration, they are responsible for backing nearly nine in 10 mortgages in the US.

“The managment of these companies involves responsibility for $2 to $3 trillion of mortgage assets. It is critical to taxpayers’ financial interests that these assets be carefully managed in a difficult environment to minimize taxpayer losses.”
Edward DeMarco, acting director of the Federal Housing Finance Agency

The Treasury Department also reversed a previous ruling enacted in 2008 requiring the companies to cut the size of their mortgage-related investments portfolios. Instead, they will not be forced to sell mortgages into an already weak market and could even buy mortgages on the market, which could help hold down interest rates.

They said the changes were made to assure financial markets it stood firmly behind the two companies and to buy more time for the two government-sponsored enterprises to reduce their mortgage-related holdings.

Fannie and Freddie have played a key role in the administration’s policies to keep mortgage interest rates low, restructure unaffordable mortgages, stop foreclosures and funnel money to housing programs around the country. And an administration official said it could take several years to resolve the future of the companies.

“It’s created a government-purchasing facility other than the Fed.”
Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research firm in Washington

Ms. Petrou continued that the recent moves “make sense in a short-term way because you avoid market volitility,” but the prospect of limitless aid will make it harder to extricate Fannie and Freddie from the government.

“In a long-term way, it promotes nationalization of the US mortgage finance. We have increasingly gigantic, increasingly federal agencies eating up every mortgage out there.”

Fannie and Freddie’s core business is their role in guaranteeing payments to mortgage investors, but for years they earned additional profits and generated controversy by maintaining a large investment portfolio filled with mortgages and related securities.

“The companies are nowhere close to using the $400 billion they had before, so why do this now? It’s possible we may see some horrendous numbers for the fourth quarter and , thus 2009, and Treasury wants to calm the markets.”
Bert Ely, a banking consultant in Alexandria, Virginia

The Obama administration hopes its unlimited guarantee to back Fannie and Freddie, no matter what the cost, will bolster investor confidence and bring private sector buyers back into the market to help hold down morgage costs.

The newly relaxed portfolio limits are meant to calm investor worries that Fannie and Freddie would be forced to sell some of their mortgage holdings just as the Federal Reserve was preparing to wind down its purchases of mortgage-backed securities next spring. The Fed’s commitment to buy up to $1.25 trillion has helped to keep mortgage rates near record lows; without the support some economists have said that could rise up to 6% by the end of 2010.