Thursday, February 28, 2008

Freddie & Fannie can buy more loans!

Good afternoon,
Federal Regulators Fannie Mae and Freddie Mac, the biggest buyers of home mortgages, are going to remove limits on the amount of loans and securities that they can own. This could help the housing market. (Source: The New York Times) This could help relieve the credit crunch in the long term though it is a risky move for the two mortgage giants.
According to the agencies that control these mortgage companies, they are making the change because the organizations began filing financial reports again after lapsing years ago. This is questionable and may be more related to the mortgage “crisis”. One still remaining limitation of course is that Fannie and Freddie still have to hold 30% more capital than they are required to by law, due to tumultuous times in the mortgage market.
Fannie Mae reported a 2 billion dollar loss for 2007, and is noting that home prices will further decline in 08. This is following a 4 billion dollar profit in 06.
In many ways, this means that large mortgage buyers will hold many loans – including potentially fatal loans. While this might help the home market, it isn’t the best financial investment the government could make. Democrats in Congress are of course calling for more. The fact is, few investors are buying mortgage backed securities these days - so without Freddie and Fannie, there are very few investors to buy them. Without investors, banks won’t create loans. Without loans, the credit crunch continues.
Bottom line: it may help home prices, and it may help lenders – but it will surely be a bad deal for these two agencies. I wonder who will ultimately pay for the deals gone bad.
Dani

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