Friday, July 11, 2008


PREDICTION: This weekend, while we're enjoying the summer weather, making trips to our local farmers markets, and playing with our children, the Fed will intercede and bailout Fan and/or Fred ...quietly on the weekend, just as with the Bear Stearns Bailout.

Stock shares plunged as much as 50%, before the market even opened. By 11 am EST, the losses were 35% and 45%, with hours of trading to continue.

Virtually every home mortgage lender, from giants like Citigroup to the smallest local banks, relies on Fannie Mae and Freddie Mac to grease the wheels of the mortgage market. Virtually every Wall Street bank does business with them. And investors around the world own $5.2 trillion of the debt securities backed by the companies, out of a total of $11 trillion. The woes have moved from a trickle to a torrent.

The US government is weighing placing one or both of the ailing mortgage giants into a conservatorship.

Under a conservatorship, shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.


Dave Phillips said...

You are correct - the feds will bailout freddie and fannie before the markets open on Monday. They really have very little choice. Soon they will also be providing FHA backing that will shake things up (in a good way). FHA use to be a prime mortgage tool but dropped to about 3% of the market. It is expected that FHA loans will be 20% within the year.

Montpellier said...

Eh, don't hold your breath - they're trying to bail them out now with massive buys on the open market, but any bond guarantees will come with major strings attached. Among those will be regulatory requirements regarding stricter lending standards and larger loss reserves.

What that translates to is this: borrowers will qualify for even less than they do now.

The growth of FHA market share does not result from an increase in lending from the FHA, but is a reflection of the reduction of overall lending. The FHA slice, with higher lending standards, is going to stay the same - there will just be a lot fewer total mortgages made overall.

So, what does that mean? Fewer buyers with fewer dollars to spend. At best, FNM and FRE will be limping along in close to their current form.

What does that mean for housing prices around our MSA? Heading down!

Dave, I found your "quiz" on the caarblog to be a most informative repacking of the questions asked of Jim Duncan in the comments on his blog - see It is nice to have a glimpse into that data - I think it supports the idea that prices are falling here too.