What the Fannie Mae/Freddie Mac Takeover Means for You

As you may have heard by now, the Federal government, through the newly created Federal Housing Finance Agency, has taken over Fannie Mae (FNMA - The Federal National Mortgage Association) and Freddie Mac (FHLMC - The Federal Home Loan Mortgage Corporation). This was done to try to shore up confidence in Fannie and Freddie, which together have lost over $14 Billion in the last 4 quarters.

Why does this matter? Fannie Mae and Freddie Mac own or guarantee almost half of the $12 Trillion in outstanding mortgage debt in this country. Financial markets have lost confidence in Fannie and Freddie as a result of their huge losses. Their stock values have dropped by over 90%, and foreign banks and other investors have been unloading their holdings of FNMA and FHLMC stock. This has caused FNMA and FHLMC to have to raise capital by selling bonds at "higher than treasury" market prices. So, while long term treasury interest rates have been dropping, rates on mortgage bonds have been going in the opposite direction. This move by the Federal government, and the full backing of the U.S. Treasury that comes with it, should help to bring FNMA and FHLMC's borrowing costs down which will ultimately lead to lower mortgage rates.

Who wins and who loses? If it goes as planned, the winners will be the embattled housing industry. With lower borrowing costs and lower mortgage rates, mortgage lenders may loosen up some of the tighter underwriting rules that they are forcing on the system. Hopefully this will reduce the backlog of inventory of both new and existing homes on the market. Obviously this would be good for both buyers (who would continue to have access to low interest rates and helpful mortgage programs,) and sellers (who will see prices level off--or even climb again--with the decrease of inventory and more buyer activity.) The losers are likely to be the current stockholders of FNMA and FHLMC stock, which may be worthless after its all said and done.

Will this work? It certainly should! What we know for sure is that the status-quo with FNMA and FHLMC would certainly not work. They could not have continued on with their viability in question, their stock prices continuing to plummet on every bit of bad news, and their borrowing costs continuing to rise.

Should I get excited about this? Yes! You should get excited because this will definitely boost confidence in the credit system. Greater confidence from first time home buyers--combined with lower interest rates--should serve to get the market moving from it's current stagnant state. Hopefully bad news in the mainstream media of the pending demise of FNMA, FHLMC and the whole mortgage industry will now be replaced by positive news on lower interest rates, rising home sales and increasing consumer confidence.