Written by Tanya Gerritz
Published July 18, 2009
There’s so much going on right now I don’t really know where to start. Well first off, as you will see below, I added some other information to show you how the market has changed over the past year.
Now I could continue to focus on the current economic worries – oil prices, trade deficits, weak currencies, high unemployment, inflation, and so on but instead I’m going to discuss recent news out on the financial markets regarding Fannie Mae and Freddie Mac.
This update is basically going to educate those who don’t really understand Fannie Mae and Freddie Mac and how they affect our economy as a whole.
So what are Fannie Mae and Freddie Mac? They are the largest purchasers and insurers of residential mortgages in the country, holding or backing more than $5 trillion in mortgages, which is about half the outstanding mortgage debt in the United States.
They were created to provide low and middle income Americans the opportunity to purchase houses with a reasonable interest rate by adding to the available cash that banks can loan people. By buying mortgages from banks they replenish the banks’ accounts allowing them to make more loans.
Now a lot of people think that they are owned by the government but they are not, they are both publicly owned companies and their stock is traded on the open market. People also believe that they are backed by the government but the law that created them explicitly says the government does not guarantee the loans.
Now yes this is said in the law that created them but due to the fact that it would be devastating to the economy if they went under the Federal Reserve would step in with additional support if needed, like they are now!
What problems are they facing now? Well Fannie Mae and Freddie Mac don’t just buy home loans and repackage them into bonds that are traded on Wall Street; they also guarantee all of the loans they sell to investors! Therefore, if a homeowner defaults on a mortgage, Fannie and Freddie will step in and make good on the loan.
Well, as we all know, homeowners are defaulting and being foreclosed on at alarming rates, so Fannie and Freddie are being forced to make good on those guarantees to investors. Already they’ve posted combined losses of $11 billion, and investors are worried there’s much more to come!
Fannie Mae and Freddie Mac are required by their government regulator to have a financial cushion but due to their recent loses the cushion has been dwindling.
Investors who are worried that the two companies will not be able to raise new money during a time in which it has been expensive and difficult to do so started frantically selling off their shares causing the companies’ stock prices to fall to a two-decade low, dragging the rest of the market into bear territory.
What is being said about the situation? One former Fed official says the two companies are technically insolvent, while others disagree.
Some analysts were arguing that the sell-off was overdone and that neither company is in imminent danger of collapse, while others called for a federal takeover of the two.
What would happen to the housing market if these two mortgage institutions did indeed go under? It would be a catastrophic event that would totally disorient the private housing market. William Seidman, publisher of Bank Director magazine and former chairman of the Federal Deposit Insurance Corp. says, “It would be as close to a disaster as I can think of. If they could no loner package and guarantee mortgages, funding availability for housing in the U.S. would be drastically reduced.”
If they did fail, says Brad Neigel, a senior analyst at Aite Group, a financial services research firm, “it would be the collapse of the entire mortgage industry as we know it.”
What is currently being done to help the two mortgage giants? The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to help the two companies.
The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if needed, buy stock in the companies to make sure they have enough money to operate.
The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed – a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.
Source:
The Oregonian, MSNBC.com, MSN Money, Wells Fargo
This update is basically going to educate those who don’t really understand Fannie Mae and Freddie Mac and how they affect our economy as a whole.
They were created to provide low and middle income Americans the opportunity to purchase houses with a reasonable interest rate by adding to the available cash that banks can loan people. By buying mortgages from banks they replenish the banks’ accounts allowing them to make more loans.
Now a lot of people think that they are owned by the government but they are not, they are both publicly owned companies and their stock is traded on the open market. People also believe that they are backed by the government but the law that created them explicitly says the government does not guarantee the loans.
Now yes this is said in the law that created them but due to the fact that it would be devastating to the economy if they went under the Federal Reserve would step in with additional support if needed, like they are now!
What problems are they facing now? Well Fannie Mae and Freddie Mac don’t just buy home loans and repackage them into bonds that are traded on Wall Street; they also guarantee all of the loans they sell to investors! Therefore, if a homeowner defaults on a mortgage, Fannie and Freddie will step in and make good on the loan.Well, as we all know, homeowners are defaulting and being foreclosed on at alarming rates, so Fannie and Freddie are being forced to make good on those guarantees to investors. Already they’ve posted combined losses of $11 billion, and investors are worried there’s much more to come!
Fannie Mae and Freddie Mac are required by their government regulator to have a financial cushion but due to their recent loses the cushion has been dwindling.
Investors who are worried that the two companies will not be able to raise new money during a time in which it has been expensive and difficult to do so started frantically selling off their shares causing the companies’ stock prices to fall to a two-decade low, dragging the rest of the market into bear territory.
What is being said about the situation? One former Fed official says the two companies are technically insolvent, while others disagree.Some analysts were arguing that the sell-off was overdone and that neither company is in imminent danger of collapse, while others called for a federal takeover of the two.
What would happen to the housing market if these two mortgage institutions did indeed go under? It would be a catastrophic event that would totally disorient the private housing market. William Seidman, publisher of Bank Director magazine and former chairman of the Federal Deposit Insurance Corp. says, “It would be as close to a disaster as I can think of. If they could no loner package and guarantee mortgages, funding availability for housing in the U.S. would be drastically reduced.”
If they did fail, says Brad Neigel, a senior analyst at Aite Group, a financial services research firm, “it would be the collapse of the entire mortgage industry as we know it.”
What is currently being done to help the two mortgage giants? The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to help the two companies.
The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if needed, buy stock in the companies to make sure they have enough money to operate.
The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed – a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.
Source:
The Oregonian, MSNBC.com, MSN Money, Wells Fargo
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