The Fed to the rescue....??
This weekend Henry Paulson announced the government takeover of Fannie Mae and Freddie Mac. In Paulson's words "the housing downturn is at the heart of the economic downturn." Fannie and Freddie combined are projected to have $14 billion in loses. Fannie was able to raise capital, Freddie not so able.
The goal of this Fed plan is supposed to be:
The plan to inject up to $100 billion in each of the government-chartered mortgage companies could not only help lower mortgage rates but, some investors are hoping, buoy the overall economy. The plan could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments.
Is this good news?
Well investors in the stock market seemed to think so, at least on Monday, the Dow Jones industrial average rose over 250 points. The Standard & Poor's 500 index jumped 24 points, and the Nasdaq composite index rose 17 points. This rally was short lived though as the market has opened down today, fickle investors have started to shorten the financial's. Not a big surprise, investors are reactionary and tend to sprint when they should be pacing, today we see that a bit more thought is being given to the ramifications of this takeover.
Now that we have the market's take on this, what does this mean to Joe homeowner and Susie home buyer? The ultimate goal is to create a more advantageous lending environment, thus stimulating the housing market, and the overall economy right? So, will this action by Treasury do that?
In my humble opinion, the answer is no or at least not in the short term. I have personally been in the mortgage trenches these last 6 years and I have seen how the lenders have handled the housing market turn thus far. This move to bailout Fannie Mae and Freddie Mac is a band-aid at best, it will keep the status quo not create a more favorable lending environment.
Let's recap what has been done thus far to help the mortgage meltdown:
1. The Fed's lower rates, making money cheaper.
2. The Fed's opened up more money to the lenders.
3. The Fed's personally bailed out some of the lenders.
4. The conventional and government loan limits were raised to allow Fannie, Freddie, and more government backed loans.
5. Tax breaks on mortgage insurance extended and no taxation for short sale recipients.
What did these five things do for the mortgage and housing industry up to this point?
1. Banks only want to do Fannie, Freddie, and government backed loans
2. Loan guidelines tightened across the board.
3. Harder for buyers to qualify for loans.
4. Less loans being given to home buyers.
5. Less homes being sold.
Now the Feds are stepping in and bailing out Fannie and Freddie the two entities, excluding FHA and VA, that are doing the most loans. So my question is, if Fannie and Freddie are already backing most of the loans today how does a bailout increase the number of loans that will be given? FHA and VA loans are government backed loans, and like Fannie and Freddie they have tightened their guidelines since the onslaught of the credit crunch, so will the Feds come in and ease up guidelines for their new companies? Obvious answer is no.
So what has changed with the Fed's taking over Fannie Mae and Freddie Mac? confidence is the only thing that can be and so far has been helped with this move. For the consumer that means you could see a nice little dip in interest rates. How long will that dip last, is anyone's guess. The bond market is affected by more than just housing and the financial's. You still have oil, inflation, employment, the global economy, world issues, and a presidential election to contend with.
Interest rates are not the reason home buyers are having issues qualifying for loans, it has been the tightening in lending guidelines that were instituted by Fannie Mae, Freddie Mac, FHA and VA, coupled with the loss of investors for mortgage backed securities that have made obtaining home loans harder and harder.
Before the mortgage meltdown there was a healthy secondary market for mortgage backed securities, which created 100's of loan options and a competitive lending environment-granted it got a little too competitive, but it allowed more people to buy homes. The only way there will be a positive turn in the housing market is if diversity comes back, more lenders, more loan programs. Putting the four major lenders under one boss does not bring diversity into the lending industry, if anything it tells the world that the only mortgage backed securities that are safe to buy are those that are backed by the government.
This move by the Fed to create security is going to do the opposite and handicap lenders, just look at what investors are doing to the financial's today. Now there will be no confidence in a bank's ability to set their own lending guidelines and this is not just for home loans it will move into auto, credit cards, business, and commercial loans.
Personally, I think this move by the Fed helps Fannie and Freddie two very important lending institutions, but hurts the financial industry as a whole.