Copy for Real Estate Guide Column for 8-27-10
REAL ESTATE PATTERNS
By Ken DuVall

THE FANNIE/FREDDIE SAGA

Fannie Mae and Freddie Mac may be in effect insolvent, but they're backing over half of all U.S. mortgages. Naturally, some people are nervous. The two government owned/supported enterprises (GSEs) stood behind 62% of new home loans this year, compared to 27% of new loans in 2006. Add in Ginnie Mae and fully 90% mortgages are supported by the U.S. government.

Right now, the loan market is almost entirely dependent on Fannie, Freddie, and Ginnie. Why should you care? Since the government seized Fannie and Freddie in 2008, it essentially owns them. So far, the mortgage giants have cost taxpayers roughly $145 billion to cover their losses, with more losses looming. If a bailout becomes necessary, the cost would approach $1 trillion.

Clearly, it doesn't benefit the housing system overall- or the government- to have a mortgage market that is almost exclusively government-backed. We need a way to bring the private sector back into the mortgage market. But if the government pulls back too quickly, it could trigger another housing crash.

Many scenarios are in play. The agencies could be disbanded in favor of new entities, or be split into two pieces -- a "public" securitization function and a "private" mortgage investment portfolio. In the public-private scenario, the private component would become fully private over time, with the government slowly removing its support. Such a scenario seems likely at this point.

While many industry watchers believe altering the housing finance giants is necessary, and that the federal government shouldn't play so large a role in the mortgage market, they also agree that given how shaky the housing market is, any major changes won't come immediately. We need to give some consideration before we disturb what has been crucial support of the mortgage market.

Given that there isn't much of a private mortgage market, the likely thing that can be done now are small, incremental changes that will get us where we want to be in 5 to 10 years. For borrowers, that means any changes to Fannie and Freddie would likely materialize slowly. We don't want to do anything that makes things worse.

Although Freddie and Fannie are almost single-handily propping up the market, such government involvement in the securitization of mortgages isn't sustainable. But right now, there's not much choice, with investors still too jittery to trust paper that isn't backed by the federal government. There's not a lot of alternative credit out there. We're stuck with probably the 90% of mortgages now backstopped by the government over the next few years.

The irony is that if we're really concerned about the health of the housing market and want to see it recover, we should be making it easier to obtain credit. Unfortunately, we're doing just the opposite. We're actually slowing or stifling the housing recovery by restricting the flow of credit. It's the classic closing the barn door after the horses are gone. Meanwhile, if you can qualify for a loan, the 30-year fixed rate dropped to its lowest level since 1971 last week to as low as 4.25%.

Ken owns Ken DuVall & Associates, REALTORS at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings at www.KenDuVall.com and call Ken at 345-3700 for all your real estate needs. Free consulting.