Fannie/Freddie and the U.S. Government - What does it all mean?

By
Real Estate Agent with Ebby Halliday Realtors

By now we all know that the U.S. Government has taken control of Fannie Mae and Freddie Mac and that the newly created Federal Housing Finance Agency regulates both entities.  What I am finding is that there is confusion about what the impact of this move will ultimately be on the real estate market.  In order to explore this question, we must first remind ourselves of the very practical function of the GSE's (government sponsored enterprises) as Fannie and Freddie are often called.  While the GSE's do not lend money directly to consumers, they are vital to our real estate market's function as they provide a vehicle that effectively replenishes the lenders' money when mortgages are made.  Very simply put, Fannie and Freddie keep lenders from running out of money to lend.  Since most Americans must secure a mortgage in order to purchase a home, this role is necessary to keep the flow of money working in real estate markets across the country.
 
We can see how vital the role of Fannie and Freddie is, so when they approached the brink of failure, in stepped the U.S. Government to seize control.  While there is some disagreement as to whether or not the GSE's actually would have failed and as to whether there were other solutions worthy of consideration, the expansion of the government route was chosen...it is done now.  Accordingly,  I am very pragmatic in believing that because the historic takeover is complete, the time for debate is over.  Our focus as real estate professionals needs to shift to determine what benefits to our businesses and clients will result from the GSE's being part of the U.S. Government.  Let's look at a few notable ways that this change can impact the real estate market and, in turn, the greater U.S. economy:
 
·         Liquidity - Once the GSE's officially came under the umbrella of the U.S. Government, investors (domestic and foreign alike) gained confidence in the GSE's and immediately began investing their money in mortgage backed securities....flooding our markets with much needed capital.  In addition, the U.S. Treasury can provide a cash infusion as needed going forward.  
·         Interest Rates - Significantly improved liquidity and a greater sense of stability provides an environment which favors lower interest rates.  On Monday, September 8th, the morning following the Sunday evening takeover, conventional interest rates responded by dropping .5% or more on the day relative to the closing prices available the prior Friday.  Although the interest rates fluctuate daily, the new Fannie/Freddie should result in a lower interest rate climate relative to what it would have been without the takeover.
·         Housing Price Stability - Since Fannie and Freddie combine for nearly half of all mortgages in the U.S., the ongoing ability for borrowers to obtain conventional funding to buy homes is critical to avoiding even further housing value drops across the country.  By ensuring the continued availability of mortgage money to the conforming loan limit of $417,000 in our market (well above our FHA limit of $271,050), Fannie and Freddie's government backing will help us avoid a dramatically deepened crisis. 
 
When this added stability is combined with a more favorable interest rate climate, one can begin to see a scenario in which the large supply of available housing will begin to be absorbed, putting supply and demand back in balance over time.  Because the U.S. economy is largely driven by consumer spending (>60% of GDP), the average American's housing value is a huge component of stabilizing the greater economy.  Accordingly, the government control of the GSE's will likely be favorable for real estate professionals and our respective abilities to make housing affordable and attainable to homebuyers for years to come.

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