Fed Fannie Mae / Freddie Mac bail out - what next?

Mortgage and Lending with SecurityNational Mortgage

By now everyone has heard about the historic bail out of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) by the government. In the short term this looks like a good move. The two companies are saved from insolvency and they can continue with business as usual. Is this good or bad in the long run? I think it depends on how ready FHA is to take the lead in mortgage lending in America.

bailoutLook at some of the ramification of the take over.









  1. The CEOs will be fired - Great… it should have happened a long time ago.
  2. The boards will be replaced - same as above!
  3. There will be restructuring of the balance sheets - not so good!

The devil is always in the details.

The restructuring will result in a new class of stock to be created that has precedence over current stock holders. This new senior preferred stock will earn 10% a year.

Fannie and Freddie will be required to make major cuts in their mortgage holdings. Over several years they will have to cut their portfolios by almost 70%.

Mortgage rates are currently in the 6% range - Fannie and Freddie will be forced to borrow at 10% - you do the math!

With Fannie and Freddie cutting their portfolios by more than two-thirds this means that conventional mortgage money will be choked at the source.

This leaves FHA as the sole survivor. Let’s face it with Fannie and Freddie cut to one-third of their original size they will become secondary players. Is HUD prepared for the role it is being thrust into. For years this agency has taken a back seat and is now at 3 times it’s former production levels. This change will put a substantially larger burden on HUD.

Let’s hope that HUD is up to the challenge.

Comments (6)

Jake Planton
www.JakePlanton.com - Portland, OR

Hey Lee,


What are you thinking about with advertising this?  I am trying to figure out my approach.  Any ideas?

Sep 08, 2008 02:37 AM
Robert Worthington
Worthington Realty - Manitowoc, WI

To bad to so for real estate agent and home sellers alike.  As interest rates go up, home fall.  As natural gas goes up, home prices also fall.  Pick your poison these days. 

Sep 08, 2008 02:38 AM
Hope Goss
Ventura Property Shoppe - Ventura, CA
Ventura Real Estate

You bring up some things that I hadn't read so far - especially the part about reducing their holdings. 

Sep 08, 2008 02:38 AM
Lee Walsh
SecurityNational Mortgage - Lake Mary, FL
Executive Talent Scout for Mortgage Professionals

Jake - My advice is to become an FHA expert if you are not already.

Robert - You are right... it will become more challenging for us all!


Hope - I think the major new outlets have left this important part of the bailout to the fine print - Glad I could bring it to your attention.

Sep 08, 2008 03:33 AM
Lori Lincoln And Associates
Top Agent Serving Dighton Taunton, Rehoboth and more! - Taunton, MA
Top Agent Taunton,Dighton Rehoboth &more

All too confusing. Just wondering if this will help the market short term, long term or both?

Sep 08, 2008 02:23 PM
Lee Walsh
SecurityNational Mortgage - Lake Mary, FL
Executive Talent Scout for Mortgage Professionals

Lori - thanks for the post.. I think  the  move to take over Fannie and Freddie is good only because the alternative of letting them both fail could have been fatal to  the housing market.

In the very short term it has been good. The stock market went up, and rates went down (just a little) since the action by the Fed. The outlook for the longer term will depend on how well FHA is prepared to carry the lions share of the burden for the foreseealbe future.


Sep 09, 2008 02:32 AM