03 Feb 09 Fed Agrees to Buy $500 Billion in Bad Credit Mortgage Securities
The Federal Reserve agreed to buy $500 billion in bad credit mortgage securities guaranteed by Fannie Mae and Freddie Mac that will ensure loan modification opportunities for millions of distressed homeowners.
The Obama administration is developing proposals to help rescue the banking system that could cost taxpayers hundreds of billions of dollars beyond the $700 billion bailout Congress already has approved. Details are still being worked out. But the administration is looking to spend hundreds of billions more to address the foreclosure crisis, help banks get out from under weighty bad assets and expand liquidity programs. Looming above these is a proposal to set up a federal bank — dubbed a “bad bank” — that would buy troubled assets clogging financial institutions’ balance sheets. This would free the institutions to lend money and would entice wary investors back into the market, proponents say.
But the government will have to commit far more money than policymakers were discussing even a few weeks ago. “I think we’re talking hundreds of billions of dollars,” said Brian Gardner, an analyst with the research firm Keefe, Bruyette & Woods. “I don’t think there’s anyone who doubts the administration will be going back to the Hill for more than the $350 billion” recently released from this fall’s $700 billion bailout package. The International Monetary Fund wrote in a report Wednesday that home loan losses from banks in the U.S. and Europe already have topped $1 trillion and could reach $2.2 trillion. At that rate, the banks will require “at least half a trillion dollars” to remain solvent, the report says.
Federal Deposit Insurance Corp. Chairman Sheila Bair has mentioned the “bad bank” proposal in a series of interviews as one option the government should consider. By purchasing bad assets that banks can’t sell now, the government would set prices for them. This could cost the banks dearly in write-downs. But it also could give investors clarity about the relative strength of the financial institutions. That, in turn, could encourage those on the sidelines to begin investing again. “Buyers are going to say, ‘Wait a minute, these are valuable assets; we just don’t know how to price them,’” said Travis Larson, a spokesman for the Securities Industry and Financial Markets Association. “Now, many of these toxic assets aren’t toxic anymore, because in fact, the market value has gone up as buyers re-enter the market.” Homeowners need loan modifications and banks need insurance money to re-write mortgage loans for distressed borrowers who are delinquent on their loans.
Bank stocks surged Wednesday on investor expectations about the proposed plan to purchase assets. Wells Fargo & Co. soared 31 %, Citigroup Inc. 19 % and Bank of America 13 %. “It’s pretty great news for pretty much all banks, especially the big ones,” said David Stepherson, portfolio manager at Hardesty Capital Management. Administration officials said they expect Treasury Secretary Timothy Geithner to unveil his plans for a new financial industry rescue next week.
House Financial Services Committee Chairman Barney Frank, D-Mass., is interested in Geithner’s plans for spending the second $350 billion of the existing bailout, his spokesman said.”Because we released this money as a result of congressional action, we would like very much to know what it’s going to be used for, and what the priorities of this administration will be,” said Frank spokesman Steven Adamske. Frank has called for spending tens of billions of the money to address the foreclosure crisis.
Tags: bad credit mortgage, foreclosure crisis, loan modifications
