Fannie Mae and Freddie Mac Bailouts: Not in Canada
By Brian Madigan LL.B.
Fannie Mae and Freddie Mac are government-sponsored entities.They were formed by the federal government in the United States: The Federal National Mortgage Assn. (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
Both companies buy mortgages from savings and loans, banks and other lenders to generate additional cash for those lenders to make more home loans. They also guarantee mortgages. Together they hold or guarantee $5.4 trillion in mortgages This represents about half of the home loans outstanding in the United States.
Fannie Mae was created by President Franklin D. Roosevelt in 1938 to make sure funds were available in the housing market during the difficult economic times in the course of the war, and Freddie Mac was created in 1970 so that Fannie Mae would not have a monopoly on government-backed mortgages.
Both companies ran into financial hard times with the decline in house values. The value of the mortgage portfolioes which they held fell, and at the same time they when called upon to make payment on their guarantees.
The federal government of the United States had to take over both companies otherwise there would have been a subsatntial housing crisis. As more households ran into economic problems they would be taken over by the banks, and marketed at ever decreasing prices, until the entire sector had been liquidated.
From the perspective of the US government, this is a $200 Billion bailout for both companies. In fact, this is the largest bailout of financial institutions ever.
But, it's not quite that likely in Canada. The primary reason is conservative lending and guarantee policies on the part of CMHC and Genworth which offer similar products to Fannie Mae and Freddie Mac, excepting that they hold rather modest mortgage portfolios and their main business is the guarantee business.
More conservative policies essentially mean safer and lower risk inventories. This translates into fewer defaults and funding obligations piursuant to their guarantees.
In the US, the lenient policies fueled the market over the last few years.
Consequently, more houses were sold, but the new owners really couldn't afford them. With the increased number of houses in the housing pool, the supply increased, and when the defaults began to materialize, there was a limited market for resale. Those who might have qualified before, no longer qualified. In essence, that caused the housing crisis, together with the downturn in the economy.
There are several plus factors in Canada:
· More strigent loan policies of CMHC (the market leader)
· Higher quality of purchasers
· A resource based economy
· Higher interest rates
· Longer "to the market" times for builders and developers
The result of a decline in the Toronto market has been a 4% decline in sales and an 8.5% decline in prices from their peak. That's it! And, now you might expect to see a reversal in Septemeber: either stability or a slight increase.
Brian Madigan LL.B., Realtor is an author and commentator on real estate matters, Coldwell Banker Innovators Realty
905-796-8888
www.OntarioRealEstateSource.com
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