Treasury Injects Liquidity Into Fannie, Freddie

Matt McGrath, a principal with Evensky & Katz Wealth Management in Coral Gables, Florida, says the government is “taking every means possible to help them [Fannie and Freddie] through a liquidity situation to ensure their business continues as normally as possible.” Because Fannie and Freddie are the centerpiece of the housing markets, “it’s necessary that these entities, Fannie and Freddie, do function, and the government would much rather do that via assistance than a full-fledged takeover.” The real issue at stake, McGrath says, is liquidity. If the government can help Fannie and Freddie “survive the liquidity crisis, they can get them on track for the long-term, reassess the risk of their portfolios, and the underwriting going forward.” That being said, “certainly areas for folks to be cautious would be for anyone that does individual equity selection, there’s going to be a lot of concern about the stocks for Fannie and Freddie, because regardless of how this works out, the stockholders would be the first ones to take it on the chin.”

The markets, no doubt, are also digesting the Federal Deposit Insurance Corporation’s (FDIC) takeover of another lender, IndyMac bank of Pasadena, California, which put the FDIC on the hook for as much as $8 billion in depositor losses. IndyMac, which was spawned by Countrywide Financial Corp. in 1985 and spun off in 1997, was not even a major source of subprime mortgages, according to Venable LLP, a law firm with offices in Washington and Los Angeles. Rather, Venable says “the company’s specialty was Alt-A loans, alternative mortgages that let borrowers forego income verification and other traditional documents required to demonstrate their creditworthiness.”