Is this any way to run a mortgage market?

HousingWire, By Paulina McGrath

Fannie Mae and Freddie Mac are especially vulnerable to losses from financial market volatility today because their existing capital cushions are extremely low. These Government Sponsored Enterprises or GSEs were the focus of the largest housing Federal bailout in history. Ironically, their lack of capital is a direct result of the Federal bailout deal and leaves them – yet, again – at risk for needing a second government bailout.

Let us first recall that each GSE reported disappointing fourth quarter 2014 financials. That alarming financial performance resulted from significant losses in the financial derivatives the GSEs use to hedge exposure to interest rate risk. It also highlighted the fact that the bailout agreement with the U.S. Treasury (codified in a Preferred Stock Purchase Agreement or PSPA) requires each GSE to remit all quarterly profits to the Treasury. Critically, it requires them to reduce existing capital cushions each quarter until they reach zero in 2018.

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