With their stocks down more than 70% a piece since the beginning of the year and their collective losses amounting to some $12 billion since last summer, the Federal Reserve and the U.S. Department of Treasury say they will take the necessary steps, if needed, to keep these government-sponsored enterprises, or GSE’s, afloat with ample capital to continue backing mortgages from banks, like Countrywide and Bank of America (BAC). It’s a desperate measure in a “crisis of confidence,” on Wall Street, experts say.
Will the moves soothe Main Street’s distress? Here are the top five things to keep in mind when scanning the headlines:
In Some Ways, This is a Relief.
If Fannie Mae and Freddie Mac were left to dry, the housing market and the U.S. economy would be in for much tougher times, since the two entities hold more than $5 trillion, or about half, of the country’s mortgages. It would be tougher for consumers to buy homes, tougher for banks to insure mortgages. “Fannie Mae and Freddie Mac are critical to the housing industry and we believe the actions [proposed by the Fed and Treasury], should they be needed, are extremely important,” says Mary Trupo, spokesperson for the National Association of Realtors. “The reality of it is, the Federal Reserve and the Treasury, by acting as a backstop, have simply validated what everyone had assumed for years - that either institution was too big and too vital to fail. All they’ve done is avert a disaster,” says Greg McBride, senior financial analyst at Bankrate.com.
Expect a Bigger Tax Bite.
Treasury Secretary Henry Paulson says he would get the “authority” to buy shares of Fannie Mae and Freddie Mac and offer them as much money as they need, should they request it. (Read: He would aim to get “tax payer dollars” to fund the companies). “Ultimately any time Uncle Sam writes a check he’s doing so with tax payer dollars," says McBride. How this proposal will get funded is the “trillion dollar question.”
Expect Higher 30-Yr Fixed Mortgage Rates.
Though not as a direct result of any skepticism surrounding Freddie Mac or Fannie Mae, or due to any need for a bailout in the coming weeks. Understand that it is not uncommon for mortgage rates to fluctuate a quarter or a half-point over the course of a few weeks. Market watchers expect some higher movement in the short term, but that could have much to do with inflationary pressures. Should Fannie and Freddie need a bailout, “you could see a 1% bump higher in rates,” says Wayne Brough, chief economist at freedomworks.org, a lobbyist group in Washington, D.C.
Expect a Weaker Dollar.
A government bailout may raise the U.S. deficit and weaken the dollar’s strength globally, says Brough. So you may want to put off that European vacation if money’s tight.
Act Like It’s Business As Usual.
Whether or not Fannie Mae or Freddie Mac will come begging for money, prospective borrowers will still need to spruce up their credit reports and shore up savings to qualify for a mortgage. Aim for good credit, proof of stable income and enough money for a down payment, says McBride. And remember, time is on your side. “If it means taking 6 months to boost your savings, prices are not going to run away from you in the interim,” he says.
Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8 p.m.