Sunday, September 7, 2008

Feds Foreclose On Fannie, Freddie

Preamble: Any professional in any walk of business life who persisted on insisting or who collaborated with those insisting on persisting that the housing crisis would not affect the general economy? Eat your words -- in whole chunks and without seasoning. Housing has impacted the economy so much, the Feds took over Fannie Mae and Freddie Mac on Sunday. The good news is, by Monday, the take over was already showing a positive impact on the market.

by Broderick Perkins
© 2008 DeadlineNews.Com

Unauthorized use of this story is a copyright violation -- a federal crime.

Deadline Newsroom - Preamble: Any professional in any walk of business life who persisted on insisting or who collaborated with those insisting on persisting that the housing crisis would not affect the general economy? Eat your words -- in whole chunks and without seasoning.

And take some of the responsibility for abject denial that has effectively exacerbated and extended this housing crisis. That includes both journalists and publications that succumbed to real estate industry pressure to shut up and NOT do your job.
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DeadlineNews.Com has long stated that the housing market is a cornerstone of the national economy. We've approached our coverage with that stake in mind. With the housing market goes the economy, like it or not.

No matter how grim and ugly the housing market -- and with the worst housing market since the Great Depression, it's pretty grim -- no matter how much reporting the "doom and gloom" may indeed impact a buyer's decisions to buy -- or not -- or a seller's decision to sell -- or not -- not recording history or reporting only through rose-colored glasses just isn't an option.

And anyone who used the threat of withdrawing ad support to bully pulpit censoring the news? Ask yourself. Have you in any way assisted your clients, the housing market, or the economy?

We think not.

As John McIlwain, senior resident fellow of Housing at the Urban Land Institute, writes in "Crossing the Rubicon," "We aren't in Kansas, anymore..."

To prevent unprecedented harm to the mortgage market and its impact on the nation's economy, the federal government had to step in on a Sunday (Sept. 7) take control of Fannie Mae and Freddie Mac, agreeing to pump billions into the two financially flailing mortgage giants.
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"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," said Treasury Secretary Henry Paulson in a statement on federal actions to save the two secondary mortgage market operations.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."

The take overs are designed to stabilize the home loan market and make mortgages cheaper and easier to get. That could yank the reins on the downhill run of home prices.

A day after the take overs, Eric Nelson, broker/owner of the Honte Group in Campbell, CA said the move was already impacting the market.

"The significance of this occurrence is an instant shot of stability to the mortgage market, and in turn, lower interest rates," he said reporting 30-year fixed interest rates available 5.875 percent with zero points on a $417,000 home loan. The rate 5.625% with 1 point for loan amounts to $417,000.

Thursday before the Feds took control of Freddie Mac and Fannie Mae, Freddie Mac reported the average 30-year fixed-rate mortgage was 6.35 percent with an average 0.7 point for the week ending in Sept. 4.

Nelson also said even larger ($417,000 - $729,500) fixed rate mortgages where cheaper than smaller mortgages were last week, coming in at 6.125 percent with no..

Five-year fixed rate loans were as cheap as 5.15 percent with one point. All the lower rates assumed the borrower's credit score was 720 or higher, he or she had a 20 percent equity stake in the home after financing and his or her income can be verified, Nelson said.

"What a wild morning! Bonds were up by over 125 basis points and interest rates are lower by 0.25 across the board on loan amounts of $729,750 or less," said Honte Group partner/owner and mortgage planner Rob McCarthy.

But there's also concern government intervention could change the mission of the two mortgage giants after a short-lived calm.

"While the short-term impact of the Treasury’s actions over the weekend served to calm the markets and restore confidence, in the longer term these entities need to be able to fulfill their historic mission," said California Association of Realtors' Executive Vice President Joel Singer.

"A privatized Fannie and Freddie will short-circuit the countercyclical role the GSEs (government sponsored enterprises) have played during precarious times in real estate markets," Singer added. "Without an institutionalized mortgage-backed securities market, mortgage capital will be less predictable and more expensive, and adjustable-rate mortgages could become the standard loan for home buyers, as could higher down payment requirements."

Fannie Mae and Freddie Mac are charged with the critical mission of providing stability and liquidity to the housing market. They buy mortgages from lenders and hold them in their portfolios or repackage them as mortgage-backed securities that are traded on Wall Street.

The strategy exponentially increases the mortgage making capacity of major lenders. The added supply of mortgage money helps lower interest rates. Lower interest rates and the supply of money to lend helps boost the housing market.

But Fannie and Freddie, so called "government sponsored enterprises (GSEs)," also guarantee all the loans that they sell to investors. When a homeowner defaults on a mortgage, Fannie and Freddie must make good on the loan. Right now, the two GSEs have $5.4 trillion in guaranteed mortgage-backed securities and debt outstanding -- an amount equal to the nation's publicly held debt. Is that NOT a housing market-economy connection?

Homeowners are defaulting on mortgages and facing foreclosures at record rates and that's been forcing Fannie and Freddie to make good on investor guarantees. By July this year, the two posted combined losses of $11 billion. Investors shy from losses. If the GSEs can't raise money through investments, they can't buy additional loans and that puts their survival and investments at risk.

In the most far-reaching federal effort yet to stem the credit chaos spawned by the nation's housing hangover, control of Freddie Mae and Fannie Mac has been turned over to a new regulator, the Federal Housing Finance Agency (FHFA), spawned by the "Housing and Economic Recovery Act of 2008's" statutory merger of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight.

Detailed provisions of the take over are available in the "Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers." Scroll to the bottom of the page for those details.

© 2008 DeadlineNews.Com

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Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews Group -- DeadlineNews.Com, a real estate news and consulting service and Web site and the new Deadline Newsroom, DeadlineNews.Com's news back shop. In both cases, it's where all the news really hits home.

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