Tuesday
May 22, 2018

The Fannie Mae, Freddie Mac Factor

      |
-A A +A

The Fannie Mae, Freddie Mac Factor

Fannie Mae and Freddie Mac gain strength via federal support.

The stock prices of mortgage giants Fannie Mae and Freddie Mac have dropped dramatically this summer, prompting the federal government to take the unusual step of making its support of the government-sponsored enterprises explicit.

Why are the companies’ share prices falling? Investors fear they will collapse because of rising mortgage defaults driven by home price declines.

What are the default rates on loans held by the companies? For Fannie, 1.22 percent for single-family loans delinquent 90 days or more, up from 0.62 percent; for Freddie, 0.81 percent, up from 0.49 percent. The figures are for April and were reported in The Wall Street Journal.

What happens if they collapse? Mortgage rates will rise much higher.

Will they collapse? Not likely. The Office of Federal Housing Enterprise Oversight, the companies’ regulator, says Fannie and Freddie have enough capital to withstand extreme conditions.

What if the extreme conditions are realized and their capital runs out? Then they’ll need to raise capital by issuing more stock. Given the belief—made explicit in July by federal regulators—that Fannie and Freddie will be backed by the government, the process of raising capital should be easy.

What happens if home prices fall much further than anticipated and the newly raised capital runs out or stock prices fall to zero? The federal government will take over the companies (without a doubt) and assume the mortgage debt default risk.

Does this mean that taxpayers will lose $5 trillion? No, the U.S. government might lose some money or even possibly make money if defaults slow down.

But, I keep hearing that $5 trillion in taxpayer money is at risk. The $5 trillion would be lost only if all mortgages are written off. This assumes everyone no longer pays mortgages.

1.666665
Average: 1.7 (3 votes)
Your rating: None