Mortgage Meltdown: Next Steps Coming Soon in Rescue of Fannie, Freddie

The market turmoil that has battered government sponsored entities Fannie Mae and Freddie Mac to the point that some are questioning their solvency actually helped the two firms until recently, according to a new report from Financial Insights, “Fannie Mae, Freddie Mac and the Feds: What’s Next for Mortgage Market Players.”

According to the report, both firms need to raise additional equity -- which could be difficult with current market conditions -- or reduce their assets. If they reduce assets, meaning being less active in loan purchases, there could be serious repercussions for the mortgage market, the report said.

“Fannie and Freddie currently purchase 68 percent of all new US home mortgages, compared to 45 percent one year ago.  This means that if they fail, nearly 70 percent of US home buyers would be unable to qualify for financing,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers “The declines in home prices we are currently experiencing would pale in comparison to the rapid free-fall in home values that would result if 68 percent of home buyers suddenly found themselves without funding options.”

Now the government is floating various plans to stabilize the two GSEs. The U.S. Treasury is seeking Congressional authorization to increase the credit line from the current $2.25 billion for Fannie and Freddie as well as temporary authorization to buy equity in either.

“Fannie Mae, Freddie Mac, and the government are really stuck between a rock and a hard place,” according to the report, which predicted “an incremental savior strategy from the government” with further actions possible in the future.

But government intervention isn’t the only possible remedy. Nicholas and the CMPS Institute are among the growing number of individuals and institutions that have called for completely privatizing Fannie and Freddie and eliminating their ties to the government.

“Breaking up the companies and completely privatizing them may very well be a viable long-term solution that could prevent a crisis of this magnitude from occurring in the future,” Nicholas said.  “The delicate balance here is not to sow the seeds of next crisis while simultaneously preventing a full-scale meltdown of the US housing market and financial system.”

If the government does take additional steps to shore up Fannie and Freddie, those actions will likely coincide with falling confidence in the firms, the Financial Insights report added, providing opportunities for “credit monitoring, collections and recovery firms [that] should benefit from the ongoing backlog of delinquent loans and foreclosed properties.”