Ahead of projected losses for Fannie Mae and Freddie Mac, the Treasury Department said it will double its financial backing of the government-run companies to $200 billion in losses each and would increase the size of their retained mortgage portfolios to $900 billion.
The Treasury said it was doubling its support to the troubled mortgage finance giants in an effort to stabilize the real estate sector.
“The Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market, to help maintain mortgage affordability, and to help keep interest rates low,” said Treasury Secretary Timothy Geithner.
Washington’s two largest foreclosure-prevention initiatives of the last 12 months have fallen flat with only a handful of borrowers having been helped despite promises that hundreds of thousands would qualify.
Officials hope to clear the red tape and rigid terms that have doomed past mortgage-aid efforts without burdening taxpayers with many billions of dollars in funding costs.
The $200 billion additional funding will be made through the use of the foreclosure-prevention law passed by Congress last July, the Obama administration said.
“Using funds already authorized by Congress for this purpose, Treasury is amending the Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities designed to ensure that each company maintains a positive net worth, to $200 billion each from their original level of $100 billion each,” said Geithner.
During the Mesa, Arizona meeting, Housing and Urban Development (HUD) Secretary Shaun Donovan said that each household will save an average of $2,300 annually.
Approximately 6 million foreclosures additionally within the next three years are predicted by Donovan if the initiative is not executed.
Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property.
For instance, if a property is worth $200,000 but the principal balance is $210,000 or less, a homeowner may qualify.
The current value of the property will be determined after the homeowner applies for the refinance.
The Treasury department is supporting Fannie and Freddie to help increase assurance that the government is supporting the two government run entities.
“This is not a judgment about the expected losses ahead,” Geithner said when asked about the doubling of the guarantees for Fannie and Freddie.
“It underscores commitment, and that is very important to help keep mortgage rates low.”
The announcement ended all speculation that the government was looking to shutter the two government-run companies and shift their massive holdings elsewhere.