Well, whether this is another gaffe or not, we don’t know yet. But House Democrat Barney Frank, who is the chairman of the House Financial Services Committee, has unexpectedly sent shudders through the financial world by calling into question the safety of investing in mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).
“People who own Fannie and Freddie debt are not in the same legal position as [those who own] Treasury bonds, and I don’t want them to be,” Frank said in an interview Thursday.
According to the Washington Post, until now, federal officials — who took over GSEs two years ago to save them from collapse — have signaled to the market that Fannie and Freddie debt have the same legal standing as Treasury debt.
Bloomberg: “Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be, I don’t feel any obligation to bail you out,” Frank said. Congress will “certainly not” extend any new protections to bond and mortgage-security investors beyond what exists,” Frank told reporters after speaking to a conference of black, Hispanic and Asian Realtors in Washington today.
Frank’s comments widened the spread on Fannie Mae’s two-year debt and prompted a reaction from the U.S. Treasury Department, which reiterated its financial support for the companies.
“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 during this current crisis,” said a department spokesman.