The worsening plight of Fannie Mae and Freddie Mac set off alarm bells this week, as the ailing government-sponsored enterprises threaten to drag down the housing market further.
The congressionally chartered companies were created to increase home ownership and affordability in the United States. They inject liquidity into the mortgage market by buying loans, packaging them into securities and selling them to investors. Fannie and Freddie own or guarantee more than $5 trillion in U.S. mortgages, nearly half of all outstanding home loans.
The securities are not officially backed by the government, but the strong sense is that Uncle Sam would step in before letting the securities go bad. That allows the two companies to borrow at attractive rates and creates a stable, secondary market that helps ensure other private parties issue affordable loans.
The role of Freddie and Fannie in keeping money flowing has only been magnified during the steep housing downturn, as other buyers of mortgages have dramatically curtailed their activity or gone under. They probably buy close to 90 percent of loans originated today, several industry observers estimate.
"The private mortgage security sector is shut down," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.
But as housing values continue to decline and delinquency levels rise, even among the prime mortgages that Fannie and Freddie focus on, both firms are under growing pressure. Together they've lost $11.8 billion during the last three quarters and at least 74 percent of shareholder value this year.
The three potential scenarios for Fannie and Freddie - a worsening fiscal picture, an outright failure, and a bailout or takeover - all carry dramatic consequences that would ripple through the economy.
If Freddie and Fannie continue operating, the likelihood that they'll be forced to make good on increasing numbers of loan guarantees will have several serious implications, said Chris Mayer, senior vice dean at the Columbia University Graduate School of Business.
It will become harder for them to raise money and buy new loans, making it more expensive and difficult for consumers to obtain mortgages and driving housing values down even more.
This will mean little immediately for holders of fixed mortgages with no plans of moving, "but if you're one of the 4 million who today are under distress, you're out there trying to refinance or can't pay the rate, it affects you directly," said Susan Wachter, professor of real estate at the Wharton School of the University of Pennsylvania.
She added that it would diminish the efficacy of the various legislative responses to the housing crisis, such as increased caps on loans from Freddie and Fannie, making it that much harder for the nation to emerge from the housing downturn.
Bailout or takeover
Every industry observer The Chronicle spoke to said that the government would step in as a last resort to prevent an outright failure of Fannie and Freddie, either through a bailout or so-called conservatorship like the one the New York Times says the Bush administration is considering.
"There is a widespread view that they are too big to fail," Mayer said.
How various parties fare under such a plan depends on how it is ultimately structured, something that no one can know today.
Mahesh Swaminathan, mortgage strategist for Credit Suisse, said the government could provide the entities with new tools for raising capital, "such as the discount window as a vehicle for short-term borrowing."
Wachter said the government could take over the companies, paying holders of Fannie and Freddie bonds in part or in full, but leaving equity shareholders holding worthless paper.
Christopher Thornberg, principal at Los Angeles consulting firm Beacon Economics, said the government might break each entity into two operations, one to grapple with past debt and another division to continue buying and packaging loans to keep the mortgage market humming.
Despite these unknowns, a government takeover could be the best scenario for the overall mortgage market. Because it provides a more explicit government loan guarantee, it could help ease interest rates, Mayer said.
The losers in this scenario, however, are taxpayers, who could end up swallowing Fannie and Freddie's losses.
Outright failure
Federal legislators on both sides of the aisle - including Sens. Chuck Schumer, D-N.Y., and John McCain, the presumptive Republican nominee for president - said this week that the two companies can't be allowed to fail. If it somehow did happen, the consequences would be haunting, observers say.
"Without Fannie Mae and Freddie Mac, I'm concerned we would have no confidence, no security and no liquidity" in the mortgage market, said Scott Stern, CEO and co-founder of Lenders One Mortgage Cooperative, composed of 123 small to midsize mortgage bankers that collectively are the ninth-largest U.S. mortgage lender. He said that without the two companies providing liquidity and stability, "It could potentially mean the elimination of the mortgage market as we know it."
Down payment requirements could soar to something on the order of 40 to 50 percent, he said. Still, Stern emphasized that he thinks Wall Street is overreacting and that the two entities have relatively stable portfolios of loans.
IndyMac Bank, a prolific mortgage specialist that helped fuel the housing boom, was seized Friday by federal regulators, in the third-largest bank failure in U.S. history.
IndyMac is the biggest mortgage lender to go under since a fall in housing prices and surge in defaults began rippling through the economy last year -- and it likely won't be the last. Banking regulators are bracing for a slew of failures over the next year as analysts say housing prices have yet to bottom out.
The collapse is expected to cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion, potentially wiping out more than 10% of the FDIC's $53 billion deposit-insurance fund.
The Pasadena, Calif., thrift was one of the largest savings and loans in the country, with about $32 billion in assets. It now joins an infamous list of collapsed banks, topped by Continental Illinois National Bank & Trust Co., which failed in 1984 with $40 billion of assets. The second-largest failure was American Savings & Loan Association of Stockton, Calif., in 1988.
Don't Fannie Mae and Freddie Mac handle about half of all mortgages in the USA?
Also, wasn't there some serious talk that with the US currency so screwed, and the loans market going tits up, that large investment funds are looking for something set against the US dollar and therefore immune to currency fluctuations. Oil is set in US$ and that the fund money was now what is driving the Oil Futures market to the current record levels!?
Joined: Nov 20, 2005 Posts: 2,147 Location: Dunners
Posted: Sun 13th Jul 5:28pm Post subject:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
Joined: Aug 24, 2007 Posts: 2,248 Location: Whiter than a Snowman with a Bukkake fatish
Posted: Sun 13th Jul 5:53pm Post subject:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
How does that compare to the increase it's had over the past 10 years?
Joined: Nov 20, 2005 Posts: 2,147 Location: Dunners
Posted: Sun 13th Jul 6:02pm Post subject:
j1015642 wrote:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
How does that compare to the increase it's had over the past 10 years?
It was doing very well especially 2 to 3 years ago. Then before last year the return was lower. I thought that it was "low risk" conservative investment as it wasn't the share market or anything.
I guess I am paranoid, as all the other financial institutions seem to be collapsing and dragging down others. The amount of money I set aside each week for both my supers (work and private) I would have been able to buy a decent bike instead. It is all very well putting money aside for the distant future, ie retirement but you still have to live for today as well!!!
Last edited by avantibill on Sun 13th Jul 6:07pm; edited 1 time in total
SYDNEY - Plummeting property values have prompted warnings Australia is heading for a one-in-a-100-year slump.
New figures from property analyst Residex showed house and unit prices in nearly every city and rural centre fell in June.
The last time all states fell at the same time was just before the Great Depression. The slump is affecting the top end of the market as well as the lower end.
Joined: Jun 18, 2004 Posts: 10,867 Location: on your nerves!
Posted: Mon 14th Jul 1:38pm Post subject:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
Joined: Feb 23, 2005 Posts: 6,321 Location: churchur
Posted: Mon 14th Jul 2:31pm Post subject:
CaptainCaveman wrote:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
Hmmmm... anyone keen on Kiwisaver now?
Yep...
but only because I will be able to reroute it to paying off the mortgage on the house we just bought while the company and govt still put money into a savings fund for me...
Joined: Jun 18, 2004 Posts: 10,867 Location: on your nerves!
Posted: Mon 14th Jul 2:32pm Post subject:
inzane wrote:
CaptainCaveman wrote:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
Hmmmm... anyone keen on Kiwisaver now?
Yep...
but only because I will be able to reroute it to paying off the mortgage on the house we just bought while the company and govt still put money into a savings fund for me...
Yarp, that would be the sensible thing to do - forget any of those other 'investment funds'
Joined: Mar 26, 2007 Posts: 450 Location: Getting ready for Transrockies
Posted: Mon 14th Jul 4:30pm Post subject:
avantibill wrote:
My super had a return of -22.5% in the last financial year (March I think) it is heavily invested in properties (NZ), I will wonder if it will be worth anything by Christmas?
If it is for your super fund then you need to be looking long term and look at returns over a 10 year plus period. There will be cycles in this period which will be negative.
If you cannot tolerate a negative return you are invested in an incorrect fund and should complete an "investment risk profile" to find out the sort of funds which suit you.
Don't remove your funds when the market drops - let it go up first
SYDNEY - Plummeting property values have prompted warnings Australia is heading for a one-in-a-100-year slump.
New figures from property analyst Residex showed house and unit prices in nearly every city and rural centre fell in June.
The last time all states fell at the same time was just before the Great Depression. The slump is affecting the top end of the market as well as the lower end.
Funny that since demand is still much greater than supply, with no change in that equation forseeable in the next couple of years. The market is not falling, it's just flat - to try to compare the current market with the great depression is sensationalist. Also, the current issues disproportionally impact on the low end of the market. Rising interest rates don't have much effect on those who can afford to write 50% of the increase off in tax credits.
The Americans may have munted their economy, but the end of the world is not yet nigh.
Here is a nice little write up with lots of graphs, predicting a 20-30% fall in prices in the short term, and prices to not reach these levels again until 2020ish.
I have been looking at rental's of late - and he is right on the money about people expecting to be able to sell at 5% rental returns being way off base from reality.
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