Shares of Fannie, Freddie Rally as Treasury Removes Caps

Fannie Mae (FNM) and Freddie Mac (FRE) saw their shares trade almost 20% higher on Monday, after the Treasury Department announced that it would offer significant new financial support to the struggling mortgage giants, no matter how badly they perform in the next few years.

In a statement released after the markets closed on Christmas Eve, the Treasury said it would remove caps on assistance and abandon demands for the companies to trim their vast mortgage portfolios.  Previously, the companies had to shrink their portfolios at a rate of 10% a year. Now, they will be required to keep their portfolios below a maximum limit, currently $900 billion per institution, that will fall by 10% a year. However, the Treasury reiterated it remains committed to the principle of reducing the portfolios “in the future.” Fannie Mae’s portfolio ended October at $771.5 billion and Freddie Mac’s holdings at the end of November were $761.8 billion, according to the latest figures released by the companies.

The Treasury also said it would preset limit of $200 billion in credit to each of the government-sponsored enterprises and amend the terms of its agreements with both agencies to support their ongoing stability.

Fannie and Freddie, which were placed into conservatorship in September 2008 by FHFA, have already drawn down $112 billion, combined, of a $400 billion pledge from the government. According to the Treasury’s statement, the government will remove the $400 billion financial cap for three years and will cover any and all net losses through the end of 2012.

The announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in its statement.

The news boosted both companies’ stocks on Monday, sending Fannie up 17.62% to $1.23 and Freddie up 19.84% to $1.51.

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