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Better News for Mortgages
Better News for Mortgages
For the American public, Fannie Mae (the popular term for the Federal National Mortgage Association) and Freddy Mac (the Federal Home Loan Mortgage Association) are 2 of the US’s biggest financial emblems. Formed in 1938 (Fannie Mae) and 1968, the 2 mortgage associations’ main aim has been to provide affordable mortgages to homebuyers. Their success has been phenomenal and between them, Fannie Mae and Freddy Mac now own or guarantee around 50% of the massive home loan market in the US (calculated to be worth around US$12 trillion).
However, with the sub-prime mortgage crisis hitting many financial companies in the US hard, Fannie Mae and Freddy Mac have also been affected. In the last 12 months, the entities have seen their share prices fall by a huge 93%. The Treasury pledge in July to back Fannie Mae and Freddy Mac was not sufficient to change their fortunes and the federal government was recently forced to step in and undertake what has become the country’s largest-ever financial rescue.
The news that the US Treasury has taken direct action to rescue Fannie Mae and Freddy Mac from fianancial disaster is extremely welcome, not only for the US mortgage market but for property investors worldwide. Shortly after Treasury officials announced they would supply a loan facility to the associations to secure their assets until the end of 2009, US fixed mortgage rates fell and stock markets worldwide received an encouraging boost. Financial analysts expect the fixed interest rate to drop even further before the end of the year, which will do much to help the US property market, currently in decline.
As part of the rescue, the US Treasury has the option to purchase up to US$200 billion of stock in Fannie Mae and Freddy Mac to keep the 2 mortgage entities solvent and the government plans to force the 2 companies to reduce their size by at least 10% a year until they reach a size deemed to be risk-free. These moves have been welcomed by homeowners and mortgage lenders generally.
On a global scale, the Fannie Mae and Freddy Mac rescue is also a tonic at a time when many domestic property markets and mortgage firms are suffering as a result of the global credit crunch, triggered by the US sub-prime crisis. “The move by the US Treasury is extremely welcome,” comments Ken Thorkildsen, Director of Obelisk Private Finance, “and restores the public’s confidence in the mortgage market as a whole.”
Ken believes that, although global money markets are still likely to be prone to downturns, the latest developments in the US mortgage market will help rebuild faith in the credit system generally. “I believe that this may help restore credibility in mortgages and perhaps herald the start of a turnaround in the global credit market in general,” says Ken.
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