New Terms Set For Fannie And Freddie

The Treasury Department Friday changed the terms of its bailout agreement with Fannie Mae and Freddie Mac. The mortgage giants often had to pay the government back more in interest than it earned in profits, a system at odds with the goal of eventually dismantling the companies. The move appears aimed at calming financial markets.

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The Treasury Department today changed the terms of its bailout agreement with Fannie Mae and Freddie Mac. As NPR's Chris Arnold reports, those terms were proving hopeless for the companies to keep up with.

CHRIS ARNOLD, BYLINE: After the housing market collapsed, mortgage giants Fannie Mae and Freddie Mac were bailed out with more than $150 billion in taxpayer money. But the companies have had to pay a punishing 10 percent interest rate on all that money. Andrew Jakabovics is the housing economist and policy expert at Enterprise Community Partners.

ANDREW JAKABOVICS: So far to date, Fannie Mae and Freddie Mac have paid about $46 billion back to Treasury but basically get no credit for having done so. They keep falling further and further behind.

ARNOLD: That's because that's $46 billion just in interest. And they've had to borrow more to pay that. So their debt to Treasury has now ballooned to $188 billion. There's a kind of irony here that after playing a role in the subprime mortgage debacle, Fannie and Freddie have now gotten stuck with what's basically the nastiest subprime loan ever.

I mean, it is almost kind of funny that just - I mean, it's not funny if you're Fannie and Freddie.

JAKABOVICS: Right, yeah, no, the terms in which the lifeline was extended to Fannie and Freddie was designed to be punitive to send a signal that, you know, they don't expect them to ever recover.

ARNOLD: But now, Fannie and Freddie are falling so far behind that that's starting to make financial markets a little bit nervous. That in turn could push up mortgage rates.

So to avert that, the government has given Fannie and Freddie a break of sorts on their loan. The government will now get all of the company's profits, but Fannie and Freddie won't be forced to keep borrowing even more money to pay this 10 percent interest rate. Chris Arnold, NPR News.

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