This past weekend the inevitable happened. The government stepped in to take over Fannie Mae and Freddie Mac. These two companies were placed into a conservatorship in an effort to bring some stability to the housing and mortgage market.
Who are the winners and losers from this landmark move?
Winners: The investors. By investors we mean the companies that buy the debt or securities Fannie and Freddie created from the mortgages they funded. The federal government is now responsible for losses on these investments – a move which the government hopes will attract investors back to mortgage securities and create the much needed funds to fuel mortgage originations.
Losers: The shareholders. The shares prices have been in a steady decline and the move to take over the companies is not a move to buy out the shareholders. People who invested in Fannie Mae or Freddie Mac stocks are likely going to continue to be upside down (lose money on their investment) until the future of these entities is decided and, should they remain public, regain value in their share – meaning a long, long time.
As for homeowners, we will have to wait and see. With the government stepping in that should clear the way for mortgage rates to drop down. However, lending standards are still up in the air. We may not get a decision on how conservative or liberal the lending standards will be until after the next president is elected. My guess is we are likely to see stricter underwriting guidelines that are more inline with what these two companies used originally; requirements for larger down payments and more conservative debt to income ratios which may make mortgages more difficult to obtain for many.
So what’s your bargain?