U.S. Treasury to purchase bonds from Freddie and Fannie to increase mortgage lending
The Obama administration release a new program to assist state and local housing finance programs and agencies that focus on first time buyers and developing looking to add apartment rental stock in their market. The plan is for the two largest government sponsored enterprises to issue bonds backed by these mortgages and have them purchased by the U.S. Treasury. This process is similar to the securitization method used to create mortgage-backed securities (MBS).
According to the Associated Press, the volume of tax-exempt bonds that the two GSE’s issue is only 25% of the typical amount sold in a given year. This reflects the reduction in demand for this type of financial instrument. The recent collapse of the U.S. real estate market can be attributed to this drop in demand.
Howard Glaser, a mortgage industry consultant mentioned that this program came at a time when credit is scarce and we are in the middle of a very fragile recovery in the housing market. Treasury Department officials stated any losses from the loan defaults will be 100% covered by the fees paid by the state agencies. ”The expected cost to the federal government is zero,” said Michael Barr, an assistant treasury secretary.
The question I beg to ask is, where are these state agencies going to get the money to provide this financing for new home buyers and rental project developments. Just like the adage said, “There is no free lunch.