Stability, Liquidity, and Affordability
Now here is an irony for you…. Click on the “About Fannie Mae” link from the public website and the first sentence reads…. “Fannie Mae provides stability, liquidity, and affordability to the nation’s housing finance system under all economic conditions.” You think?
Reminiscent of earlier this year in the private banking world, it now seems that both Fannie Mae and Freddie Mac, the two great government-created but privately funded institutions are now facing many of the same run on the bank fears which brought down institutions like Bear Sterns. Both institutions have lost almost 45% of their value!
As a homeowner, this is a major concern. In 2008, 70% of home loans were financed through the pseudo-government institutions of Fannie Mae and Freddie Mac. Originally built as a byproduct of the Great Depression, these institutions are meant to provide a backstop of lending to the housing market, providing homeowners a means to obtain housing loans even if they are new to the housing market and have marginal credit. If these two companies lose their ability to underwrite loans, the housing market may come to even more of a grinding halt than it already is. Low end, starter family loans could become even more difficult to come by. Couple that with the fact that private institutions have made it more difficult to purchase a jumbo loan, and potentially only those people who are laterally moving between roughly equally priced properties with significant existing equity may be the only ones who can finance a home .
Some may feel this can be solved with a quick capital infusion from foreign investors like what was done with Citibank or Washington Mutual earlier this year. The problem with that is that these investments so far have turned very sour for institutional investors who came to the rescue. For example, Abu Dhabi Investment Authority, who made a significant stake in Citibank, received convertible securities which entitle them to purchase Citibank shares starting at $31.00 a piece. As of Friday, Citi closed at less than $17.00. Ouch.
What the next few weeks will bring is anyone’s guess, but it is likely that if investor confidence continues to wane for Freddie and Fannie, you can expect the US government to step in with some form of bailout package. In the mean time, the fate of the U.S. housing market remains in question.
