The following is a fictional depiction of events based on the recent events surrounding Fannie Mae and Freddie Mac. While the House of Representatives recently approved a bail-out package for the ailing mortgage buying giants, I will examine what could occur if the government did not step in to save Fannie Mae and Freddie Mac.
Disclaimer: I am not an expert in economics, finance, the stock and bond markets, and/or any other related field of study that would be required to fully understand the impact that a failed Fannie Mae and Freddie Mac would have on our economy. I am only a knowledgeable mortgage professional. =)
We buy mortgages and sell them to YOU!
Fannie Mae (the Federal National Mortgage Association) was established to create a secondary market where an investor can purchase a mortgage bond (or mortgage-backed security) in exchange for a fixed income paid within a certain number of years (term). The United States is the only country in the world with such a mortgage industry.
After Fannie Mae and Freddie Mac buys these loans from the lender's, they are securitized and sold on the secondary market to anyone who wants them. Fannie and Freddie ensure the credit quality behind these loans and with the assumed backing of the Federal Government (they do not guarantee these loans), they are bought by investors with a false sense of security.
Don't forget that Fannie Mae and Freddie Mac are a companies who's stock is traded on Wall Street. Their ticker symbols are FNM and FRE, respectively.
Now back to the story...
D-Day + 1: Fannie Mae and Freddie Mac Stock Downgraded to Sell
Merrill Lynch downgraded the stock to "sell" a day after the mortgage buying giants sought bankruptcy protection. Shares of both companies hit 52 week lows.
Fannie Mae (FNM) shares fell $10.41 to settle at $1.16 while Freddie Mac (FRE) shares fell $7.59 to settle at $1.03.
D-Day +40: Washington Mutual and JPMorgan Chase Shut Down Mortgage Operations
Due to a lack of liquidity, Washington Mutual and JPMorgan Chase announced today that they will no longer originate mortgage loans to consumers.
The news doesn't come as a surprise and more announcements by other lenders and financial institutions are expected.
"Banks can't lend their own money and expect to have enough capital to continue to operate," said Mike Kang, CEO of MK Investment Group. "Without Fannie and Freddie, lenders will need to find other sources of funding."
D-Day + 45: Home Sales at an All-time Low
A spokesman for the National Association of Realtors (NAR) stated that the failure of Fannie Mae and Freddie Mac has caused home sales to plummet.
Financial institutions that are still able to lend money has made borrowing almost impossible by further tightening their credit requirements. A survey of current credit standards showed that a buyer would need on average, 45% down with a debt-to-income ratio of less than 30%. Debt-to-income is a measure of one's monthly debt payments compared to their gross monthly income.
On top of the nearly impossible qualification standards, interest rates have gone through the roof. The average rate on a 30 Yr Fixed hit a 25 year high. Borrowers can expect to pay around 17.125% on their mortgage.
With so many buyers unable to qualify, the real estate agent is the next causalty post-Fannie and Freddie.
"I'm forced to quit the job that I love because of this mess," said Brian Johnson, a Realtor for Seattle-based Windermere Realty.
It is estimated that nearly 80% of all licensed real estate agents will find work elsewhere within the next six months.
What is being done to slow down an economic disaster that has the potential to make the Great Depression look like a small recession remains to be seen.
Coming back to reality...
With the recent approval by the House of the new Housing Bill, this dooms day scenario will not occur. But if it did, we would probably see the next Great Depression. Not only would it effect employment, it could effect retirement investments that were heavily invested in mortgage-backed securities and the financial sector, and the global economy itself!
I would hope the government would do anything and everything in it's power to prevent such an event from ever occuring.
Come to think of it, maybe they did.
Comments(4)