A Bid to Rescue Homeownership
As soon as I heard about the federal government's takeover of Fannie Mae and Freddie Mac, I began wondering what this will mean for homeowners long-term.
First, to fully understand the importance of these two companies and their bailout, you have to appreciate how they helped millions of people become homeowners.
Fannie and Freddie don't directly lend money to individuals. Instead, they were created to establish a regular flow of money to lenders who actually make home loans. The institutions buy loans from mortgage lenders -- commercial banks, savings institutions and credit unions. That in turn allows those institutions to make additional home loans.
Fannie Mae was created in 1938 during the administration of President Franklin D. Roosevelt when millions of families couldn't afford to buy a home. Freddie Mac came along 32 years later.
The two institutions were chartered by Congress as government-sponsored enterprises, or GSEs, and had an implicit guarantee from the government that they would not fail. Now we see that the implicit guarantee has become an actual guarantee.
In 2007, the two companies reported a combined loss of just under $5.2 billion, according to a congressional report. Until then, they had not reported a combined loss since 1982.
To prevent a crushing blow to the housing market, the federal government stepped in to bail the companies out.
So what now?
Well, weep if you own stock in the company -- either in an individual portfolio or, for many investors, in a mutual fund. But of course you've probably already been crying or cussing if you knew you held stock in these two companies.
Fannie Mae's stock has steadily declined from a 52-week high of $68.60 to a close of just 73 cents on Monday, the day after the Treasury Department announced the federal bailout. It's been a similar fate for Freddie Mac, whose 52-week high was $65.88 and closed Monday at 88 cents.
Fannie and Freddie's financial problems don't pose a risk if you aren't planning to sell your home soon or you don't want to refinance. That's because you don't have to worry about mortgage rates. And the bailout doesn't affect your existing mortgage, so you should continue to pay it as agreed.
However, if you're in the market to buy, or need to refinance, you may find rates slightly lower because of news that the two institutions have been rescued.