On Sunday, Sept. 7 at 11 a.m. the Treasury Secretary of the United States announced that the government will be taking Fannie Mae and Freddie Mac into conservatorship.
The first thing to understand is that conservatorship simply means control. Fannie Mae and Freddie Mac, also known as agencies, are the backbone of the real estate and mortgage financing markets. These agencies are responsible for making sure that there is always adequate funding for consumers to obtain mortgage financing for real estate.
Fannie and Freddie are government-sponsored agencies, which means that the government created them. However, up until Sept. 7, the government did not control them. Fannie and Freddie are public corporations.
As you have been hearing reported for the last few months, both of these agencies have been suffering financial losses in the billions of dollars. These losses are directly related to the national housing and financing crises that exists.
The record number of foreclosures, mortgage delinquencies and personal bankruptcies are destroying the value of the mortgage securities that Fannie and Freddie hold in their portfolios. Simply put, mortgage securities that are held by these tow agencies are backed by the consumers ability to pay their mortgages on time.
When consumers are not able to pay their mortgages, and the value of real estate declines, the securities that these agencies hold lose value. This results in the agencies inability to operate and ensure that additional funding will be available for future lending. In the end, they cannot survive without help.
The bottom line is that the current credit crisis has reached epidemic proportions and that the survival of Fannie and Freddie is a must. The government stepped in to take control was the only solution to ensure that funding will be available for mortgages and to provide stability to the housing market.
What does this mean in general?
Below are bullet points that explain the major aspects of the government takeover and how it will affect the market.
The United States Treasury now has the ability to provide an unlimited amount of funding to purchase mortgage backed securities from these agencies. The ability for Fannie and Freddie to sell their securities that money will remain available for lending.
The government control means that these companies are now backed and controlled by the government. This will almost immediately begin to create stability within the financial markets. The stabilization of the financial markets is one of the first steps to creating an economic recovery.
The bailout of these agencies will be paid for by the taxpayers, however unlike the Bear Stearns bailout, the stockholders in Fannie and Freddie will not be rewarded. Treasury Secretary Paulson has made it very clear that prior to any stockholder receiving any dividends from either Fannie or Freddie; the taxpayers must be paid back first.
At the present time there is no estimate as to how much the bailout will cost the taxpayers. A major factor in determining the total cost will be determined by how quickly the financial and real estate markets stabilize.
Interest rates are expected to remain stable for mortgage financing over the next few months. Rates are significantly lower since the announcement making financing more affordable. As of Sept. 9 Jacie Casteel from Sterling Mortgage in Lakeport reported that rates have dropped to 5.875 with zero points for a 30-year fixed mortgage.
What opportunities exist for homeowners and homebuyers?
With the stabilization of the markets, the decline in property values is expected to slow down. If you have been waiting for values to drop further, it is possible that the bottom is very near and sitting on the sidelines much longer may cause your cost of homeownership to increase. The time to act is NOW.
Lending guidelines may get a little tougher with new government control. This potentially means that accessing funds for mortgage lending may become a little more challenging and make it harder for borrowers to qualify. Once again, if you have been waiting to purchase or refinance your home, now may be one of the most affordable times to do so.
There are many unknowns pertaining to the takeover of Fannie Mae and Freddie Mac. However, the takeover was a must and the actions of the government will eventually bring badly needed stability to the markets helping to reinvigorate the battered housing market in the US.
Ray Perry is a Realtor with CPS Country Air Properties. Jacie Casteel is a loan agent with Sterling Mortgage.
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