ANSWER: We're about to find out!
Fannie Mae and Freddie Mac are involved in 70% of the home loans made in the U.S. and own or guarantee $5.2 trillion in mortgages. For perspective, the total debt of the United States government is $9.5 trillion.
The housing finance crisis finally reached the end game over the weekend as Treasury Secretary Paulson and Fed chairman Bernanke effectively ended the “implicit” guarantee of the nation’s largest housing credit companies – that guarantee is now explicit, making it clear they will do whatever is necessary to maintain the availability of home mortgages.
Fannie Mae and Freddie Mac stock prices are down more than 80% from a year ago, 60% from three months ago and lost more than 45% last week. Their stock prices fell again yesterday, after the bailout announcement which left questions about whether the companies would be intact in their present form in the future.
Meanwhile, bank stock prices have fallen by 40% in the last three months and by 25% in the last month alone. Most analysts believe that the failure of IndyMac last week will be followed by many more as banks are required to book losses on real estate development loans that continue to mount. Local and regional Colorado banks tend to have relatively large real estate loan portfolios, so bank financing for new housing development financing in Colorado is becoming very scarce and we may see failures here as well.
UPDATE: In a press conference this morning, President Bush said the government wouldn't take control of the two companies, saying he didn't believe the government had a role in bailing out private enterprises -- even if they are government sponsored enterprises like Fannie and Freddie. "We want to make sure they remain shareholder-owned companies," he said. Mr. Bush said he hoped the package outlined by Mr. Paulson would reinforce confidence in the U.S housing market, both at home and abroad. "It's going to be very important for these institutions to focus on their core mission, which is to provide refinancing for the mortgage industry," Mr. Bush said.
In mid-day trading today, Fannie and Freddie stock prices were down about 19% from yesterday's close on continued heavy trading volume.
Links:
Wall Street Journal editorializes that the Treasury should place Fannie Mae and Freddie Mac in receivership (bankruptcy). Some congressmen have used these companies as ATM machines to fund campaign contributions, and now the taxpayers will pay for these policies. http://online.wsj.com/article/SB121607717137252459.html?mod=opinion_main_review_and_outlooks
Gerald O'Driscoll, former Vice President at the Federal Reserve Bank of Dallas, says “Never Again” should we put taxpayers at risk for the success of Fannie Mae and Freddie Mac. http://online.wsj.com/article/SB121607820954752561.html?mod=opinion_main_commentaries
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