What's up with Fannie and Freddie?

By Andrew Hoffman, Mortgage Partners, Santa Fe
Just when it was looking like we might be able to issue a sigh of relief at the end of a year-long spate of bad news, we have been inundated by word of Fannie Mae (Federal National Mortgage Assn) and Freddie Mac (Federal Home Loan Mortgage Corp) woes. For the last year, Fannie and Freddie have been the stalwarts in the market, providing an avenue for borrowers with good credit and solid income to purchase or refinance. And now, it appears that they have been sucked into the sinking ship of the credit markets.
I have gotten repeated calls from clients asking if their loans (both in place and in process) are in jeopardy. From what the Federal government has done in the last week, I believe that this is not the beginning of the end and that Fannie and Freddie will be around for some time to come and I try to reassure rattled clients. I mentioned last month in this newsletter that both Fannie and Freddie were perceived to be very highly leveraged and that losses could impair their ability to lend, but the Federal Reserve and the Treasury Department have stepped up to reassure the public that the full force of the Federal government has been put behind these two private companies.

Fannie and Freddie are GSEs (government sponsored enterprises); essentially private companies that have a “special relationship” with the Federal government because they are critical to the smooth operation of the home mortgage markets. Their relationship with implied but never tested. It was always (FNMA was created in 1938) assumed that the Federal government would help out in a crisis, but it had never been tested. Over the last weekend that test came in the form of an announcement by both the Secretary of the Treasury and the Chairman of the Federal Reserve that they would do whatever is necessary to assure that these organizations remained solid and solvent. This is ground breaking stuff as it is tantamount to the government guaranteeing these private corporations.

Nevertheless, it remains to be seen whether Fannie and Freddie are, indeed, in trouble. Their senior managements avow that they are not; however, continued foreclosures could spell trouble for both. If, as some suspect, we are near the bottom of the market, then all of this hoopla may have been unnecessary; if there is more down to go, then the Federal government has rendered the credit markets a good service. If so, it remains a task that ultimately ends up in the laps of taxpayers, to bail out these companies in order to keep homeowners and home buyers happy.