US-Controlled Mortgage Buyer Asks for $2.5 Billion Additional Aid
Mortgage buyer and reseller Fannie Mae seeks an additional $2.5 billion financial aid from the US Government. The amount is set to further strengthen the company’s war chest after posting an improved third-quarter performance.
Fannie Mae is a shareholder-owned corporation that is aimed at assisting expansion of secondary mortgage market to allow mortgage lenders to reinvest assets for more lending activities. Its sibling company, the Federal Home Loan Mortgage Corporation, or Freddie Mac, has the same structure although it specifically resells mortgages it buys from the secondary market to private investors across the open market. Both government-sponsored enterprises play crucial roles in helping keep the mortgage and housing market afloat.
The US Government has infused a $259 billion rescue package in both companies in 2008. Fannie Mae justified its additional funding request by citing the possible impact to its financial performance of current foreclosure suspension activities of major home lenders due to allegedly improper and flawed handling of borrowers’ documents. The company expects significant effects of the disarray on its delinquency rates.
The National Association of Realtors late last days released a report that revealed lower volume of new home sales in September. The industry body attributed the decline to possible fallout brought about by lenders’ foreclosure suspensions, which have obviously disrupted the entire US housing market.
Fannie Mae reported a third-quarter loss of $3.46 billion. The performance was an improvement compared to the $19.8 billion loss it posted in the same quarter last year. Company insiders said the latest financial results reflect current and ongoing efforts to curb losses specifically from high-risk mortgages it acquired in the secondary market from 2005 to 2008. The figure also reflects Fannie Mae’s roll out of more profitable strategies that include more tightened lending standards and practices.
Most outlooks for Fannie Mae and Freddie Mac, on the other hand, get dismal. This is due to a more challenging housing market period amid tepid economic growth, high employment, tighter credit, and greater uncertainties about property prices, which drive potential homebuyers at bay. Analysts are worried about the implication of major lenders’ foreclosure suspensions to the performance of both companies. This is why the additional financial aid sought by Fannie Mae is seen as necessary for strengthening the company’s war chest in the coming months.
Fannie Mae and Freddie Mac actively acquire home loans from various mortgage providers. The purchased mortgages are bundled together to form securities that are sold to investors around the world with a guarantee against possible defaults. It is estimated that currently, the two companies guarantee and own up to half of overall mortgages in the US. That translates to about 31 million home loans with a total worth possibly exceeding $5 trillion.
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