Most of us know Fannie Mae and Freddie Mac as government-sponsored private companies which procure and guarantee approximately half of all U.S. residential mortgage loans.
This week, the stock of each company took a pretty good beating! Freddie shares fell 17.9% on Monday alone - as private investors began to fear a loss of their capital reserves, brought on by nearly $11 Billion in loan defaults for the nine-month period ending last March.
Dwindling capital at both companies could require they sell more shares to raise further capital. This could dilute the value of all shares, and send investors scurrying. If the government then intervenes to support Fannie Mae and Freddie Mac - or bails them out - the shares could be reduced to near zero!
Of course, Washington is less sensitive to the plight of these stock investors than they are to the plight of those individual homeowners who make up the nearly $5.2 Trillion in mortgage loans that Fannie and Freddie guarantee. Most want these companies to grow their loan guarantees at an increased level, to stem recent downturns in the housing market in many areas of the country.
On the other hand, if Fannie Mae and Freddie Mac find themselves low on capital reserves, they will find it harder, and more costly, to buy and guarantee loans issued by lenders. This could have the effect of increasing mortgage interest rates and fees, and thereby raising the cost of the average residential transaction. An already-stressed housing market could then encounter reduced demand, and home prices would fall even further than they have in recent months.
Also of concern to mortgage watchers was the move by IndyMac bank on Monday. The lender, which specialized in loans to buyers who didn't fully document their income or assets (so-called "stated loans"), announced it will stop writing most new home loans. As a result, over 50% of the bank's 7,200 employees will be let go.
IndyMac, along with other lenders specializing in higher-risk, "no-doc" loans, have seen spiraling growth in loan default since last year.
Please read our post earlier today @ BlogChicagoHomes.com for more info, as well as a link to detailed coverage in yesterday's Wall Street Journal by reporters James R. Hagerty and Serena Ng.
DEAN & DEAN'S TEAM CHICAGO