(TX A&M Real Estate Center) – Freddie Mac and Fannie Mae stocks plunged this week, increasing fears over their ability to raise the capital they need to purchase home loans and hold down mortgage rates.
Freddie Mac shares fell 22 percent to $8 yesterday, while Fannie Mae stock lost 13.8 percent to close at $13.20.
Dr. Mark Dotzour, chief economist with the Real Estate Center at Texas A&M University, said it seems increasingly likely that the U.S. government is going to nationalize these two mortgage giants, and he sees that as a good thing.
“The concept of Fannie and Freddie is a good one,” he said, “but they have made some mistakes and squandered the value of the stockholders. Once the government takes over, the stockholders will be washed away but the bondholders will probably be bailed out.”
Dotzour said that, after nationalization, the government guarantee of Fannie and Freddie mortgages will become explicit, meaning the perceived risk of buying future mortgage-backed securities will be lower. This will cause mortgage rates to be lower and more readily available.
What is the net result for residential Realtors and homebuyers and sellers?
“If Fannie and Freddie roll over, there will be a temporary disruption in the mortgage market,” Dotzour said. “It probably won’t be for a very long period. We have to hope that the government has contingency plans in place for such an event. Ultimately, two groups will pay to clean up this mess: working people who pay taxes and people with savings who watch the purchasing power of their retirement nest egg decline as the value of the U.S. dollar continues to plummet.”
Not a chance the 2 companies will be nationalized. These 2 have 7 trillion in MBS outstanding and the government can not and will not take on the default risk of a the US home owner. The dollar would tank and the US defict would instantly increase by the loss reserves required on all the debt out standing.
FNM and FRE have kept mortgage rates artificially low for the last 30 years and as these to companies slowly sink into oblivion mortgage rates will climb and assess to mortgages will continue to be cumbersome for a long while.
Obviously the gov can’t just watch the two go down the tubes, but I have no idea what scheme they will use to prop up FNM and FRE. Probably cash infusions until things settle down.