FANNIE AND FREDDIE GET BAILOUT

Last week the US Treasury placed Fannie Mae and Freddie Mac under conservatorship. These entities are government sponsored enterprises which buy mortgage loans from banks, repackage them as securities and then re-sell them to investors. In doing so, this system frees up considerable local capital which, in turn, powers local real estate lending.

This development is yet another piece of shrapnel from the sub prime mortgage bomb which exploded last year. It should not be viewed as another major economic blow or something new and terrible that’s occurred, but rather another step in the process of correcting the sub prime problem.

The move was necessary due to the lack of investor demand for Freddie and Fannie securities due to concerns about the quality of the mortgages in the underlying portfolios. That lack of demand translated into higher interest rates, which were necessary to attract investors due to the perceived risk. That, then, translated into higher mortgage rates on the street over the past several months.

Now, with the government’s infusion of $5 billion in the form of mortgage-backed securities purchases, rates have fallen about one-half percent at the time of this writing. Rates are projected to fall a bit more in the near future as the credit markets for mortgage money ease.

Longer term consequences will include an overhaul the system to prevent another such crisis in the future. In the wake of the subprime crisis which surfaced last year, the pendulum has swung from credit that was far too easy to acquire to an extremely tight mortgage market that has further crippled real estate activity and prices. This is a step in the right direction which proffers a return to sane lending practices and reasonably available credit.