July 10, 2008

Fannie Mae & Freddie Mac: Twin Disasters

First its important to understand their role in how the markets work. They are the very center of the American housing system.

They are independent companies with an implicit government backing. That means that everyone expects the government to come to their rescue (and likely they will have to), but they are not government agencies.

Its hard to believe that the government wouldnt step in and recapitalize them or extend a line of credit to keep them solvent. The US wouldn't let the companies go under due to their central role in the mortgage market. Between them they own or guarantee about $5 trillion of mortgages, nearly half of all U.S. home-mortgage debt outstanding.

Without these guarantees, practically backed by the full faith and credit of the United States, mortgages would be much more risky and therefore expensive. The importance of creating liquidity so that property is saleable is key to the entire economy. Consider how large housing is as a sector of the entire economy, from financial services to builders and managers, to the property taxes that keep our communities afloat.

According to marketwatch "In the last week alone, Freddie has lost 47 percent of its value, and Fannie is off 28 percent. Expectations of default at the companies have also risen; it costs three times as much today to guarantee a two-year Fannie bond as it did three years ago."

Some of this is fear based on some peoples opinion that the companies are on the ropes. According to the ex St Louis Fed President the firms are already "insolvent".

Secretary of the Treasury Paulson disagrees and testifies that they are not insolvent and will not need cash infusion.

What amazes me is that we need these major dislocations to clean house. Where are the regulators? The analysts, the overseers such as Moodys or S&P? Are they asleep or in collusion. Do we suffer from a big case of CYA? I think so.....

Thanks for Reading

Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

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