Is the Fannie/Freddie bailout the end of real estate woes?


With this weekend’s seizure of Fannie Mae and Freddie Mac by the government, many were celebrating the end of the housing crisis.

Certainly, the takeover of the two GSEs – who between them have lost around $12 billion since last summer – is an historic move by the government to prop up a housing industry that is weathering its worst downturn since the great depression. And it shows a long-term commitment by the government, and by extension us the taxpayers, to keeping the housing gears going.

But it is certainly not a miracle cure for all that is ailing the real estate market.

Instead, the actions by the Treasury Department can be seen as preventing the collapse of Fannie and Freddie – institutions which own or back nearly half of all mortgage loans in the United States, and which were called “insolvent” by former St. Louis Federal Reserve president William Poole.

Had either of these two companies failed, the ramifications in the mortgage markets, not to mention the overall economy, would have been absolutely catastrophic. In one fell swoop, the great majority of mortgage lending would have ceased.

In fact, the recent troubles plaguing Fannie and Freddie had directly resulted in higher mortgage rates. And with the two companies explicitly backstopped by the U.S. Government, mortgage rates will certainly fall.

But while lower mortgage rates could spark some demand for homes, it’s not going to do anything to slow or stop the wave of foreclosures which has left the market glutted with REO properties – properties which often sell at significant discounts, putting downward pressure on prices.

It’s not going to provide much help homebuilders who still are sitting on nearly a year’s worth of inventory.

And it’s not going to help the ordinary home sellers with their homes on the market, competing against foreclosures and developers, in an increasingly-crowded marketplace of unsold homes.

Nor will it provide any assistance to the millions of homeowners who are upside-down in their homes.

These two issues: depreciating home values and increasing foreclosures which have a more meaningful impact on the real estate market, and once we see a turnaround in them, we can feel more confident about the industry as a whole.

Mince no words: Placing Fannie and Freddie under government’s control will help. Just don’t call it a bottom.


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Karl, The End Is Near, originally uploaded by sarahandsean.info.

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