By ALAN ZIBEL, AP Real Estate Writer
WASHINGTON (AP) — The Treasury Department was forced Friday to reiterate its financial support for Fannie Mae and Freddie Mac after a key lawmaker rattled investors by pointing out that their debt does not enjoy the explicit guarantee of the federal government.
Speaking to reporters at a housing conference, Rep. Barney Frank, D-Mass., noted that debt issued by the two mortgage finance companies is different from bonds issued by the Treasury Department. He also raised the risk that investors in the companies’ debt may not be paid back.
“I’ve always said to people, even when I was not too worried about Fannie and Freddie, please do not think this is federally guaranteed,” Frank said. “I don’t think it is, I don’t think it should be.”
To calm worried investors, Frank later issued a statement adding that this status does “not prevent the Treasury from treating the debt of Fannie and Freddie in the manner that it believes best supports the important goal of stabilizing the financial system.”
The impact of Frank’s comments on mortgage rates should be negligible, said Greg McBride, senior financial analyst with Bankrate.com. “This is noise compared with more significant economic data,” he said
The two mortgage finance companies were seized by federal regulators in September 2008. They are vital players in the mortgage industry, purchasing home loans from lenders and selling them to investors. They own or guarantee about half of all residential mortgages. Had they gone broke, millions of people would have been unable to get mortgages.
While debt from Fannie and Freddie does not carry an explicit government guarantee, the Treasury has taken numerous steps to reassure investors that the government will keep the companies running. Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Freddie and Fannie. So far, the companies have needed $126 billion in taxpayer aid.
“As we said in December, there should be no uncertainty about Treasury’s commitment to support Fannie Mae and Freddie Mac as they continue to play a vital role in the housing market,” Treasury spokeswoman Meg Reilly said in a statement.
Frank’s statement unsettled investors because it injected a measure of uncertainty into the market. “The status quo has some chinks in it,” said Jim Vogel, a debt analyst with FTN Financial.
Frank has scheduled a hearing for later this month on the two companies’ future. The Obama administration, however, wants to wait until 2011 to propose an overhaul the mortgage giants Fannie Mae and Freddie Mac.
The administration’s Republican critics have argued that President Barack Obama should have proposed sweeping changes to Fannie Mae and Freddie Mac last year, when he demanded an overhaul of financial regulations.