Uncle Sam is Now Officially in the Mortgage Business
By: Nick Deonas
Just about the time we thought things could not get any darker, our two step-children came forward and told us how they were in a “lot of trouble”.
Yes, Freddie Mac and Fannie Mae have fallen on hard times. Things have been a buzz the past couple of weeks concerning these two giants in the mortgage industry. There has been a lot of speculation in Washington concerning Freddie and Fannie, what a collapse would mean to the overall economy. Given the present state of our economy there is very little wiggle room to gamble on any additional negative news that would slow things even more. The Federal Government was very concerned and Sunday the Bush administration announced it was seizing the troubled giants.
There are some analysts who predict this may not be enough to stabilize the slumping housing market. When you factor in the tremendous amount of inventory, rising foreclosures, continued rising unemployment and a weak level of consumer confidence, this shot in the arm better be strong.
What could this takeover really mean to the housing slump? We’ve talked about our economy in the past few weeks and we agree that the only way to get the economy moving is to get the real estate market moving, and fast. Have we waited too late to take charge of the problem? A thirty year fixed mortgage rate is currently around 6.35 percent nationwide. This may dip as low as 5.5 percent because of this takeover. Why will the rate fall? Now investors will be more willing to buy the debt, at a lower rate from Fannie and Freddie, since the federal government is now standing behind the debt.
This move could cost taxpayers, (you and I) billions of dollars in the end. Henry Paulson, Treasury Secretary did not estimate just how much he thought it would end up costing but added that the taxpayers would be repaid before shareholders of these two companies were repaid. This plan did however spark up the global stock markets on Monday. The Nikkei (Japan) stock average jumped 3.4 percent and Hang Seng (Hong Kong) index jumped 4.3 percent. Germany’s DAX index rose 3.21 percent and Britain’s FTSE 100 jumped 3.81 percent, France’s CAC-40 surged 4.44 percent. On the world markets all these increases were directly tied to this one move by the Federal Government on Sunday.
Freddie and Fannie together own or either guarantees approximately $5 trillion in home loans. This accounts for about half of our nation’s total home loans. The two companies have lost $14 billion in the last year and it appears they will lose more until this housing market begins to recover. The Treasury Department said it was prepared to put as much as $100 billion into each company as time progresses to keep them from going broke. One thing our Government is banking on is that investors will drop a little of the nervousness they have had and will continue to buy debt of the two companies.
It is going to be interesting to see just how this plays out in the weeks and months ahead. Is this enough to get our housing market moving and start pulling our economy out of the ditches??? Time will tell.