Wed, September 10th, 2008
BAILOUT OF FANNIE AND FREDDIE!

I know the headlines are confusing, and you are wondering is the bailout of Fannie Mae and Freddie Mac a good thing for the American people?  What will this do to the Birmingham housing market?  Will the Americans be paying for this bailout in the long run?   Since the announcement on Sunday by Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart that the government had placed Fannie Mae and Freddie Mac under conservatorship, I have been doing a lot of reading by professionals in the mortgage industry, economists, and other real estate colleagues.  I have read the headlines, scaled the blogs, and discussed the issue.  The following is the easiest and most informative explanation I could find.  To keep you informed, I thought it would be good to pass it on to you:  

After meetings with the boards of directors for both organizations, the Federal Housing Finance Agency took control of Fannie Mae and Freddie Mac which are instrumental in securing home loans.  To clear up some confusion, you may be asking who are Fannie Mae and Freddie Mac?  Fannie Mae and Freddie Mac are government-sponsored enterprises that are involved in more than half of all the real estate financing in the United States. They do that by buying loans from banks and packaging those loans as mortgage-backed securities, then selling those securities. By purchasing the loans from banks, the banks get the capital to make new loans. The sale of mortgage-backed securities by Fannie and Freddie has been hurt by concerns over subprime loans and the higher-than-normal default rates on mortgages.

Fannie and Freddie are involved in $5.4 trillion worth of mortgage debt. To give you an idea of how huge that is, it is more than the amount of the privately held national debt of the entire United States. In the past four months, Fannie Mae and Freddie Mac have been involved in 80 percent of the financing of home purchases. In short, if you want to get financing to buy a home, you need Fannie Mae and Freddie Mac.

What did the government do? They replaced the leadership of these two organizations: Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac. The hope is that the rest of the staff will remain in place, and Fannie’s Daniel Mudd and Freddie’s Richard Syron, the former leaders of each organization, have agreed to stay on during the transition.

The government is going to buy $5 billion in mortgage-backed securities held by Fannie and Freddie. This will provide more capital for each organization. The Treasury Department said it will immediately be issued $1 billion in senior preferred stock from each company, but eventually the Treasury could be required to put up as much as $100 billion for each organization over time if the funds are needed to keep the companies afloat. This infusion guarantees that each organization will remain solvent, assuring that financing for real estate purchases will not be thrown into chaos. The government also will receive warrants representing ownership stakes of 79.9 percent in each firm. The existing stockholders will be subordinate to this obligation to pay the federal government, so the $36 billion in outstanding stock for these companies just moved down a notch to be in second position to the federal government. This puts those shares in the position of junk bonds, according to Standard and Poor’s ratings.

In the long run, the government wants to shrink the size of Fannie and Freddie, with their portfolios shrinking by 10 percent per year starting in 2010. All lobbying will cease; all dividends will stop; and other cost-cutting measures will be instituted to make these institutions more efficient.

One of the biggest problems in the real estate industry is the availability of financing. The government will infuse up to $100 billion into Fannie and Freddie to see them through.  This move makes financing more certain, and lets real estate agents stop worrying about whether they can get loans for their buyers. Just the certainty that loans are available is valuable, and the prospect of getting better interest rates is appealing. The loss to the taxpayers is debatable! In general, this is good news for the real estate industry and benefits the stability of real estate.

Only time will tell the effects on our local real estate market.  It will be interesting to watch in the coming months.  In the meantime, interest rates have fallen on Tuesday to 5.65%; and with a glut of inventory on the market and attractive pricing, now is a great time to buy a home!  If you know anyone on the fence thinking about buying a home, please give them my name and direct them to my website at www.newhomebham.com or click on my website tab above.  Now is a great time to jump into the game! 

Excerpts of this article were obtain from Inman News

Posted by Christina Rickey at 08:47 | Permalink |