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Fannie and Freddie

Posted by Stacey Myers July 11, 2008 11:00 AM

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This week, Fannie Mae and Freddie Mac have been generating scary headlines. There has been speculation the agencies, which basically buy loans from banks to keep mortgage money flowing to borrowers, may require a government bailout. Yesterday, Fannie Mae’s stock fell 14 percent, to $13.20 -- its lowest price in three decades. While Freddie Mac fell 22 percent to $8. And several politicians, including presidential candidate John McCain, have weighed in saying the government couldn’t let anything happen to Fannie and Freddie.

In a story in today's Washington Post, one analyst essentially says that talk of this nature can affect people’s mind-set and basically turn into a reality.

What do other people think? Is too much being made of Fannie and Freddie’s financial situations? Or are the agencies' executives and the country’s policymakers not acting fasting enough to head off a potentially big problem? Furthermore, should this subject be getting more attention in the presidential race?

Here’s the top of the Washington Post story:

WASHINGTON -- Shares of Fannie Mae and Freddie Mac, two pillars of the nation's housing market, continued to plummet Thursday as investors and federal officials contemplated the possibility that the giants of the mortgage business could require a federal bailout.

On Capitol Hill, the Treasury secretary offered reassurance that they are still on firm footing, and the Senate approved a housing relief bill that would give a regulator more power over them. On the campaign trail, the presumptive Republican presidential nominee vowed to do whatever is necessary to keep the companies functioning. In the financial world, some people had concluded that a painfully expensive rescue was inevitable, while others said it was unlikely. The speculation was taking on a life of its own, feeding a downward spiral.

Analyst Howard Shapiro of the investment research firm Fox-Pitt Kelton wrote that the prospect of the Washington-area companies becoming insolvent was remote, but he added, "(W)e cannot account for the psychological impacts of this kind of talk, which can create its own reality."

On one point there seemed to be general consensus: The failure of Fannie Mae or Freddie Mac could be devastating, making it harder for people to buy and sell homes and sending ripple effects through the broader economy.

The meltdown of the mortgage business has left Fannie Mae and Freddie Mac the main sources of funding for mortgage lenders. The companies, which were chartered by the federal government to keep those funds flowing, pool mortgages into securities for sale to investors, guaranteeing that they will cover the payments if borrowers default. They also buy and hold mortgage investments.

Although the companies and the federal government deny it, the financial markets have long assumed that the government would step in to cover the companies' trillions of dollars of obligations if they were unable to do so themselves. The belief that the government stands behind them helps explain why Fannie Mae and Freddie Mac have historically been able to borrow money at low rates -- and why the demand for their mortgage securities did not dry up as investors abandoned other mortgage-related investments.

This blog is not written or edited by or the Boston Globe.
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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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