Mortgage chat with Kimberly Blanton

Kimberly_Blanton Hi, I'm Kimberly Blanton, The Boston Globe's housing reporter. I will be chatting starting at 12:30 p.m. for one-half hour. Fannie Mae and Freddie Mac are all over the headlines, and it's potentially going to be the biggest federal bailout ever of a financial institution. I'm happy to answer questions about this complex intervention and what it may mean to you.

homer_2__Guest_ I keep hearing that Fannie and Freddie "back" all mortgages... what does that mean? Does that mean if my mortgage company can't send me $$, Freddie and Fannie do? I guess I just don't see why they're such a big cog in the wheel.

Kimberly_Blanton Thanks for the first question!

Kimberly_Blanton Fannie Mae and Freddie Mac "back" the mortgage market in two ways. They either hold mortgages they purchased from the banks and mortgage companies that made them, or they guarantee securities backed by bundled mortgages, which Fannie and Freddie then sell to the investment community. It's estimated these guarantees extend to about half of all US mortgages outstanding -- trillions of dollars.

Kimberly_Blanton So, with this intervention, the US Treasury is effectively saying, the federal government will cover any financial obligations that Fannie or Freddie are unable to meet due to their financial difficulties. Frankly, I don't anticipate that people with good mortgages on the book will be affected by this.

doggie__Guest_ What will happen to Freddie and Fannie? How much will this cost us?

Kimberly_Blanton Just think of Freddie and Fannie as "under new management." The Treasury Department and their chief regulator, the Federal Housing Finance Agency, have oversight of the companies and have replaced the old chief executives and installed new men: Wall Street veteran Herb Allison at Fannie Mae and former banker David Moffett at Freddie Mac.

Kimberly_Blanton As for how much this will cost. That's impossible to answer at this point, though some people are putting a $200 billion price tag on it.

Kimberly_Blanton To put this in perspective, the federal bailout of the US savings and loan crisis, which I covered while a reporter in Texas in the late 1980s, was a $500 billion bailout, though the government got some of that money back when it sold off foreclosed properties. It bears pointing out, however, that early estimates of the S&L bailout were much lower.

Kimberly_Blanton Any estimate of the cost of the Fannie/Freddie intervention at this point is probably guessw ork.

Mark__Guest_ How long will it take for this to affect mortgage rates?

Kimberly_Blanton Well the first question to ask is: Will the intervention affect mortgage rates? The 30-year fixed mortgage rate has increased nearly a point this year, and is now well over 6 percent.

Kimberly_Blanton The Treasury is trying to arrest the rise in rates by taking this action -- the last thing the beleaguered US housing market needs is a spike in interest rates when people aren't buying a lot of homes anyway and the market's in the tank.

Kimberly_Blanton Whether rates will go down is still tough to call, though some analysts believe they will. The thinking here is that the financial markets will be calmed, bankers will have more money to lend. Wish I could give you a date but I can't. But if rates are going to go down, there may be evidence in coming weeks -- certainly not right away. It also depends on what, if any, other surprises are in store.

ernie__Guest_ The Bush administration talks a good game about the free market, but every time some company gets in trouble, be it fannie/freddie, bear stearns, the airlines, the railroads, etc., they ring it up to the taxpayer. What's wrong with letting these sick institutions die off?

Kimberly_Blanton Most economists and analysts say that Fannie and Freddie are just too large, too integral to the proper workings of the mortgage market, too central to the nation's financial system to let them collapse. A collapse could , analysts say, create all sorts of havoc with unintended consequences.

Kimberly_Blanton I interviewed an economist this weekend who said whatever might happen, we don't want to find out. It could be ugly -- and could impact global as well as US financial markets. I guess a lot of people in Washington do believe some institutions are simply too big to fail. The economist has a good point.

Kimberly_Blanton But you raise a fascinating point: Wall Street institutions do seem increasingly to be the recipients of taxpayer largesse. Where does it stop? The precedent is set and could be difficult to reverse.

0r99877gggh__Guest_ If Fannie and Freddie control 70 percent of their market (whatever market that is), how is that not a monopoly? Why hasn't the government broken it up?

Kimberly_Blanton It's funny that you ask that question -- and it's an excellent question. As I wrote on Sunday, Freddie Mac was created by the federal government in 1970 for the specific purpose of competing with Fannie Mae, which had been established during the Depression and had become too large.

Kimberly_Blanton We have Fannie Mae and Freddie Mac. How about a third institution -- Joey Mac?!

Kimberly_Blanton Seriously, rather than break up the institutions, the better question might be what is the systemic problem with how these companies operate. If that can be fixed, can future disasters can be avoided?

baerga Markets had quite a bounce this morning...Does this solve enough things for a market boomlet pre-November?

Kimberly_Blanton Typically, financial problems don't just get swept under the rug, never to be seen again. There will be more news on Fannie and Freddie and the markets will react each time. There may also be other financial institutions in trouble and more bad news to come -- time will tell.

Kimberly_Blanton The Treasury hopes this will pre-empt panic in the financial markets -- so far the markets seem calmed by the action.

Kimberly_Blanton But with unemployment rising to five-year high of 6.1 percent in August and the economy grinding to a halt, a pre-November "boomlet" might be a tad optimistic.

homeowner__Guest_ what if any positive will come out of this?

Kimberly_Blanton Again, I am not sure anything "positive" will come out of this, though that would be a welcome by all -- perhaps a drop in mortgage rates.

Kimberly_Blanton The panic that might be unleashed on US and world financial markets if Fannie Mae and Freddie Mac became insolvent would cause $5 trillion in mortgage securities to fall in value. That would shake the stock and bond markets -- and confidence in the US economy -- around the world. It could unleash a panic of such enormous proportions that it seems the Federal regulators, starting with Fed chairman Ben Bernanke, felt strongly they had to act.

Kimberly_Blanton Of course the only way to know what would happen if they failed is to let them fail. But the risks, in the view of the Fed and the Treasury, were so exceedingly high that they were unwilling to experiment.

Kimberly_Blanton There is a risk of having such enormous financial institutions, whether Bear Stearns or Fannie and Freddie. It's a conundrum for the new millenium.

Kimberly_Blanton This is big stuff.

Kimberly_Blanton My time's up, and I didn't get to all of the questions!

Kimberly_Blanton But many of the questions that were left unanswered have been dealt with in prior questions.

Kimberly_Blanton Thanks much for joining in the chat.

Kimberly_Blanton Sincerely, Kim