James Pethokoukis

Politics and policy from inside Washington

Using Fannie and Freddie to influence the 2010 midterm elections

December 28, 2009

So the Treasury Department announces unlimited support for Fannie Mae Freddie Mac for the next thee years. I think Wall Street Pit raises a very provocative point on this might all relate to the 2010 election:

In an attempt to limit the damage the economy does to their majority in the 2010 elections, the administration is likely to go all in on mortgage modifications that require principal reduction. They can only take so much skin off of the banks in this effort and the last thing they want is to put the financial system back in another crunch. That leave Fannie and Freddie as the vehicles to bail out homeowners that so far have resisted efforts to “save” them. It makes perfect sense that the Treasury’s announcement of unlimited support would be followed by a big, new homeowner bailout program.

Business Insider also touches on this:

Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.

As does Calculated Risk:

There is a possibility that the Treasury is planning on introducing a principal reduction component to HAMP in January, and this could lead to significantly larger losses for Fannie and Freddie (just speculation on my part). There has been no announcement yet, and even if this is proposed it might only apply to Fannie and Freddie related loans, and not private MBS (the number of Fannie/Freddie loans compared to private MBS varies significantly by servicer).

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