Over the weekend the Bush Government seized the housing finance giants Fannie Mae and Freddie Mac in the largest mortgage bailout in global history. These two companies have lost some $14 Billion over the past year and according to Treasury Secretary Henry Paulson, the intervention was necessary to save the U.S. economy.
With this bail out the Treasury acquired $1 billion in preferred shares in each company while pledging up to another $200 billion. At the same time both Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron will be replaced and both companies will be under the conservatorship and management control of the Federal Housing Finance Agency.
There is no doubt that this removes a major piece of uncertainty on Wall Street and although no one can pinpoint the bottom, most feel we now have it within our sights.
But slow down – that doesn’t mean this week, it probably means sometime during the next 12 months.
There are still many questions still need to be addressed before we can even begin to think about the long-awaited housing upturn. Issues such as:
- Will this move reduce future costs of obtaining a mortgage? Speculation is that the 30-year fixed rate may drop to 6% in the not to distant future.
- Will existing foreclosed homeowners get some kind of relief? If yes, how much, under what terms and why?
- Will potential new home buyers that currently do not qualify for a mortgage, now qualify for one? If yes, what has changed and is the market ready to handle this?
- Was the financial market over extended or are Fannie Mae and Freddie Mac flawed? If yes, how should they be changed to prevent this from happening again?
So although this could perhaps be the first signal that we have reached the bottom, patience will be required, as the road to recovery will be a long one. |
