This was a great article from Barrons about Fannie and Freddie.

Shares of Fannie Mae and Freddie Mac have declined by approximately 90 percent from the previous year and both companies are reporting quarter-over-quarter losses, leading some to believe than a government take-over or complete privatization is imminent.

MAKING SENSE OF THE STORY FOR THE CONSUMER

· According to the Barron’s article, which states “should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises,” consumers would be led to believe that a government bail out is the only option.  Although a cash infusion may be needed, it is not likely that the Treasury would purchase an equity stake in either Fannie or Freddie.  Additionally, the Treasury Dept. must negotiate an agreement with the GSEs.  Fannie and Freddie continue to raise capital on their own and some reports show that the GSEs are looking for private-equity firms or outside investors to provide the financing, which would help raise capital and reassure Wall Street. 

· The article also states, “In the early 1980s Fannie was effectively insolvent, but the government allowed it to continue operating.” Many consumers are not aware of how the GSEs serve the market or what their roles are.  Unlike banks, which lend directly to consumers, Fannie Mae and Freddie Mac operate in what is known as the “secondary mortgage market.” They purchase or guarantee loans from direct lenders in the “primary mortgage market” and either hold onto them until they mature, or sell the loans in the form of mortgage-backed securities.  By the GSEs guaranteeing or purchasing the loans from banks, Fannie and Freddie are able to fulfill their congressional mission and supply an affordable and stable source of capital to lenders, allowing them to offer more home loans.

· Due to tighter lending standards, it is becoming increasingly more difficult for borrowers to secure home loans. If Fannie Mae and Freddie Mac did not guarantee or purchase primary lenders’ loans, the cost of homeownership would dramatically increase as lenders would experience an even greater capital shortage.

· Many financial institutions in the mortgage business are experiencing losses, and while the GSEs are no exception, their portfolios continue to outperform the majority of lenders in the market.  Additionally, unlike private investors which seem to have abandoned the mortgage market, Fannie Mae and Freddie Mac are fulfilling their congressional mission to provide an affordable and stable flow of capital to home-loan lenders. 

To read the full story, please click here:
http://online.barrons.com/article_print/SB121884860106946277.html

 

Thanks,
Mark Shandrow
Your Real Estate Agent for REO and Short Sales