While the ultimate ramifications for taxpayers remain uncertain, homeowners trying to sell today can thank the government for providing a backstop to
Fannie and Freddie either own or guarantee about $5 trillion of residential mortgages, roughly half the amount outstanding in the U.S. If either government-sponsored entity were to fail, the ramifications for mortgage lending would be severe and housing prices would plummet further.
On Sunday, the U.S. Treasury temporarily increased the department's lines of credit for the two companies. The plan will also give the Treasury temporary authority to purchase equity in the two companies to increase their capital. Fannie and Freddie also now have access to the
emergency lending window.
The increased federal role may spell long-term trouble for the U.S. dollar, since taxpayers or increased budget deficits are likely to fund any bailout of the mortgage giants.
Nonetheless, saving the housing market from further short-term pain clearly remains a priority among government officials. Housing prices continue to fall across the country due to meager demand and almost record high inventories.
"The bailout is for the housing market and the broader U.S. economy," says Wachovia economist Mark Vitna. "Fannie Mae and Freddie Mac provide an enormous amount of liquidity to the mortgage market. Without them, mortgage rates would be significantly higher."
Already, mortgage rates jumped sharply last Friday after reports surfaced about liquidity problems at Fannie and Freddie, Vitna says.
Some experts have said the U.S. is currently facing a housing downturn that is the worst since the Great Depression.
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?
For example, given that Fannie and Freddie now have more liquidity, "does this allow them to grow their loan portfolios permanently?" East asks. Under such a situation, banks and other mortgage lenders may be more willing to increase mortgage funding, he says.
Time will tell the full ramifications of the plans. In the near-term, homeowners can thank the U.S. government for preventing massive bleeding in the mortgage market. Over the long haul, if taxpayers fund the bill, the question will be whether this bailout was really worth it.