Fannie, Freddie Plan Staves Off Disaster

In the most recent dismal period for U.S. housing -- the 1991 to 1992 recession -- real estate suffered because of the collapse of the savings and loan industry. However, the market eventually rebounded, partially because of a significant reduction in mortgage rates, as the 30-year mortgage rate fell from a high of 10.4% in 1990 down to around 7% in 1993.

This time around, the 30-year mortgage rate remains historically low at an average 6.37%, as of July 10.

The unlikelihood that rates will fall further means the housing market currently lacks a positive tailwind. If Fannie and Freddie collapsed, rates would spike, causing another spiral downward in home prices.

"Higher mortgage rates are the last thing the housing market and broader economy need today and, if they were to go unchecked, those rising mortgage rates could kick off a negative feedback loop that would ultimately make these problems all that much more difficult to solve," says Vitna, the Wachovia economist.

Many on Wall Street had felt there was no way the government would let Fannie and Freddie fail. The question now is whether the federal government will push for Fannie and Freddie to further increase their roles in helping the housing market recover.

As Stephen East, a housing analyst with Pali Capital, questions: Does the plan just allow the mortgage market to continue to function as it currently is, which is obviously not at full speed? Or does the government provide enough cushion for Fannie and Freddie to allow the housing market to recover, and to actually grow?