Federal Regulators for 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). It could also help relieve the credit crunch in the long term, though it is a risky move for the two mortgage giants.
According to the agency that controls these mortgage companies, it is making the change because the organizations began filing timely financial reports again after accounting lapses years ago. This is questionable and may be more related to the mortgage “crisis.” One limitation that remains, of course, is that Fannie and Freddie still have to hold 30 percent more capital than they are required to by law, due to tumultuous times in the mortgage market.
Fannie Mae reported a $2 billion loss for 2007 and is noting that home prices will further decline in ‘08. This follows a $4 billion 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: This step 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
This entry was posted on Thursday, February 28th, 2008 at 1:32 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.Leave a Reply
