Prepare yourself for the hot topic of the week…the possible demise of Fannie-Mae and Freddie-Mac.The fact of the matter is that the Federal Government will not let either Freddie or Fannie be in a position where they would fail as illustrated by Secretary Henery Paulson’s announcement today that the government is planning to expand it’s current line of credit to the two companies.
The media will be a-buzz with the notion that this action constitutes a government bailout and that the housing market, mortgage market and economy as a whole are in dire straights…but this sentiment ignores some basic facts.
Fannie and Freddie currently have about $5.3 trillion in outstanding mortgage debt of which about 1% is currently in some stage of default. That 1% equates to about $530 billion of which given the most conservative estimates of the market value of the collateral leaves approximately $265 billion of unsecured or “bad debt”. Depending on the source, estimates put the costs of the Iraq War at $200-300 billion per year so as you can see the $265 billion of bad debt is neither crippling nor the prelude to an implosion of the US mortgage or housing markets.
In regards to the US mortgage market, we have returned to the common sense underwriting guidelines of 6 or 8 years ago which is a far more sustainable environment and will in the long run create a healthier housing market and economy.
The long term effect of government intervention into the operations of Fannie Mae and Freddie Mac are yet to be seen but many analyst predict that given an implied guarantee by the Federal Government that it may have a stabilizing effect.
Stay out of the aisles while the uninformed panic and run for the exits and you will be just fine.
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