Fannie & Freddie Get a Little Help From Their Uncle Sam

Fannie Mae and Freddie Mac were created by Congress years ago to hold mortgages and mortgage bonds as investments in a effort to boost homeownership. Both are government backed lenders that guarantee and package loans as securities. They own or guarantee at least 40% of the U.S. residential mortgage debt that is outstanding and are the major major sources of money for home loans in the U.S.,.

On March 19th, both Fannie and Freddie agreed to expand their puchases of U.S. mortgages and related securities after President Bush reduced the amount of capital these companies are required to hold as a cushion against lossses (monies held in reserve). Along with this, the government has agreed to provide up to $200 billion in liquidity for the troubled mortgage market, as I mentioned in a previous posted article on this blog. The reason for doing this is to help stabilize the troubled mortgage-backed securities market which is a vital part of the larger investment and securities market that has been threatening the health of the overall economy. Along with some other measures, this allows Frannie Mae and Freddie Mac to buy or gurantee $2 trillion in mortgages this year - a huge shot in the arm for the housing market. The bottom line is that this measure should greatly assist in stabilizing a very shaky housing market.

This measure as potent as it is may not, in and of itself, restart the housing market. While this is very good news, unfortunately, many (if not most) buyers and homeowners are very limited in their ability to obtain mortgage financing or refinancing due tightening standards and regulations being imposed by lenders. Therefore, this measure by itself may not have gone far enough; however, this is up for debate. This means that additional measures and steps may have to be taken by the government (whether it is the administration, treasury, the federal reserve, etc.) to effectively jump-start the housing market. However, with all the measures that have been taken in the last several weeks, we have reason to be optimistic that the economy and housing market will stabilize. While the threat to the housing market, securities market and overall economy has been huge, the response by the government has been almost without precedent. My opinion is that we are now beginning to recover from the worst housing slump since the Great Depression.

If this is true, it is indeed very good news!