The US takeover of Fannie Mae and Freddie Mac will likely ease the housing and credit crisis, by lowering mortgage rates and allowing greater availability of credit for consumers. Rates could realistically drop by 1 percentage point for a 30-year fixed mortgage rate.
There is not a clear picture of what Fannie Mae and Freddie Mac will look like over time, but the market reaction of this bailout was overwhelmingly positive. The takeover drastically lessens the probable threat to the housing market, financial industry, and the overall economy. Combined losses for Fannie Mae and Freddie Mac were $3.1 billion between April and June. Fifty percent of these credit losses were due to risky loans with ballooning payments. Both companies said that they could handle these losses, but many investors felt that with more defaults and foreclosures ahead, these reserves could diminish quickly.
Don’t expect lending standards to ease though. Fannie and Freddie will still keep a close eye on underwriting practices, and fees for borrowers with weaker credit histories will remain in effect. The primary goal is to increase the availability of mortgage finance while remaining proactive in the processes. Our economy and markets will not recover until a large portion of the housing correction is behind us. Fannie and Freddie are crucial to that turn-around.
Under the plan, both firms will abandon their goal of shareholder profit, will receive government chosen CEO’s, and the Treasury has agreed to boost each firm with 100 billion dollars if necessary. The hope is that by tapping into the enormous reserves of the US government to the government-sponsored enterprises, this plan will begin to calm down the housing market and confidence will return. The overall effect of funneling money back into housing should put a floor on the housing market. Hope is on its way! Call or email me anytime at firstname.lastname@example.org.
Michele “MAC” Cole