The fallout from Fannie and Freddie
Fannie Mae and Freddie Mac have their hands in 70% of all the mortgages in this country. What do their troubles mean for mortgage holders? John Dimsdale reports.
The logos for Freddie Mac and Fannie Mae (freddiemac.com/fanniemae.com)
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Kai Ryssdal: When you consider that between them Fannie Mae and Freddie Mac have their hands in 70 percent of all the mortgages in this country, this story gets really personal really fast.
Whether there's a bailout or a conservatorship or nothing, what's it all this mean for mortgage holders -- or those who'd like one?
Marketplace's John Dimsdale reports from Washington.
John Dimsdale: First of all, if you have a mortgage, even if its underwritten by Fannie or Freddie, don't panic, says the Brookings Institution's Douglas Elmendorf.
Douglas Elmendorf: If you have a mortgage already and don't need a new one and don't own shares in Fannie or Freddie, then you don't need to give any attention to what's going on.
But if you're planning to be in the market for a mortgage anytime soon, listen up. Fannie and Freddie borrow money in the bond markets to buy mortgages from lenders. Because of the implicit guarantee that they're backed by the U.S. government, Fannie and Freddie can borrow at very low interest rates.
But the housing collapse and the run on foreclosures has undermined the financial markets' confidence in the two companies that underwrite half the nation's mortgages. The result will be higher mortgage interest rates, says Allan Mendelowitz, a member of the Federal Housing Finance Board.
Allan Mendelowitz: If Fannie and Freddie have to pay more to borrow money, it means mortgages are going to cost more.
And that's not good news for the struggling housing industry, says Douglas Elmendorf.
Elmendorf: Any difficulty in getting mortgages pushes down the demand for housing and that lowers housing construction still further and it leaves more houses unsold on the market and it further pushes down the prices of houses.
But if the government steps in and gives Fannie and Freddie a steady source of cheap money, the lower cost of borrowing would be passed on to future home buyers. That could prove necessary now that the growing number of mortgage defaults have made private lenders extremely skittish. In Washington, I'm John Dimsdale for Marketplace.
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From Mesa, AZ, 07/12/2008
Fannie and Freddie Math: If Fannie and Freddie are responsible for 5 trillion dollars in loans, it seems unlikely that more than 2/5 of the loans will go bad. So you have 2 trillion dollars in bad loans, with a recovery rate of about 50%, which leaves you with a loss of 1 trillion dollars. Subtract any assets or profits that Fannie and Freddie may have, and you get to about a 500 billion price-tag for the bailout. Spread that out over five budget years and the taxpayers will hardly notice the difference. So what's all the fuss about! Just add it to my bill!
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