Real Estate Finance Alerts

FEDS Take Over Fannie and Freddie – So What?

The FEDS took over Fannie Mae and Freddie Mac and put them in a conservatorship where the Federal Housing Finance Agency will run them for the time being. Both Fannie and Freddie needed money and could not get it from investors due to questions about their survival. The result of this uncertainty caused rates for most loans to rise above normal and was a dark cloud over any housing recovery.

The FED intervention is a significant element of the housing recovery. It removes the possibility of the worst-case scenario where both Freddie and Fannie fail resulting in complete failure of the market for loans and possible risk to the entire banking system. It is not a perfect solution, but given our current position, I do not see a better solution.

The GOOD - The FED intervention should stabilize loan markets and improve rates by:

• Giving Fannie and Freddie money to continue buying loans.
• Easing mortgage investors concerns and should increase the buyers for their loans .
• Allowing the FEDs to buy loans from Fannie and Freddie.

The BAD – The FED intervention is problematic because:

• Both Fannie and Freddie stocks have lost most of their value and they are not likely to recover.
• The future of loan standardization is in question, will the FEDs do this too?
• I don’t like government involvement in the private sector, but these are not really private companies.

Taxpayers will probably not pay too much in the end, if any. However, if the worst-case scenario of housing and banking failure were to occur, the taxpayer would end up paying far more and the consequences would be far worse.

Cheat Sheet - Fannie Mae and Freddie Mac

Who are they? - They are publicly traded companies that have an implied backing of the U.S. Government.

What do they do? – They create loan guidelines, lending standards, and a market for the majority of loans in the country.

Why do I care? – They save homeowners money and increases the availability of loans. Without them, the housing market would not exist as we know it.