How does the Fannie Mae and Freddie Mac bailout affect you?
Yesterday Henry Paulson decided to use the power given to him by the housing bailout bill to officially take over Fannie Mae and Freddie Mac. This is a decision that has a huge impact on global financial markets. So how does this change affect you? Here is a list of the winners and losers in this situation.
Homebuyers with cash - The news of the takeover sent mortgage rates on 30 year fixed conforming loans by almost a quarter of a percent according to Bankrate and it is expected to fall a bit more in the next few weeks. So homebuyers who are looking to get a new loan may be saving quite a bit of dough. Lending criteria is more stringent than previous years so loans may only be available to the most qualified borrowers with a substantial downpayment and great credit.
Investors in financials and homebuilders - The stock market rallied on the news that the government is taking over Fannie and Freddie. The biggest winners are the financial and homebuilding industry.
Banks that invested in Fannie and Freddie's debt - Fannie and Freddie sold trillions of dollars in mortgaged backed securities to central banks all around the world. For example, China's People's Bank owns more than $300 billion in Fannie and Freddie's mortgage backed securities. If both of these companies defaulted on all of these securites the Chinese national bank may have gone bankrupt.
Non-Americans - As I said in the previous point, many foreign banks purchased the debt backed securities issued by Fannie and Freddie. This bailout by the United States government essentially protected the assets of many foreign banks and non-Americans in these countries should be thankful that their banks are not going bankrupt. Additionally, the money used for the bailout is straight from the pockets of American taxpayers.
American taxpayers - This bailout is not free. Noone knows the final damage this bailout will do to the Treasury, but most believe that the losses will be in the hundreds of billions. Considering that Fannie and Freddie holds approximately $5 trillion in home loans and currently more than 9% of loans are in the process of defaulting, then simple math tells us that these two companies could potentially lose $450 billion. Additionally, taxpayers will have to pay for the upkeep and operations of these companies so the costs will keep on increasing for years to come.
Banks depending on Fannie and Freddie dividends - Dividends from Fannie and Freddie's stocks have been eliminated. According to this article, many small banks around the country used the preferred shares of Fannie and Freddie as income investments. Now that the dividends are eliminated these banks no longer have a steady income stream and may fail.
Existing shareholders of Fannie and Freddie's stocks - This is pretty obvious since the stock price of Fannie and Freddie fell to under $1. Technically these two companies are now under a conservatorship which basically means that they are bankrupt. As a result those who hold these stocks directly or through a mutual fund are seeing losses in their investments.
Home sellers facing plunging home prices - Even though this bailout will reduce mortgage rates for the best borrowers, it probably will not do anything to stem the plunging home prices in the most bubblicious areas of the country. Home sellers that are upside down in their loans will still have to deal with losses by themselves.
Lobbyists for Fannie and Freddie - They have been silenced now that the government owns Fannie and Freddie.
The bottom line is that noone really knows what exactly will happen in the next couple years, but letting Fannie and Freddie fail completely does not seem like a valid option. The global reach of Fannie and Freddie is humongous and this takeover move has some commentators saying that America is now "more communist than China" and "more socialist than France ". Indeed, America is using public funds to take over more than 50% of the credit market. Whether this decision makes America stronger or weaker in the global economy is up for debate. As consumers, all we can do is be vigilant as to where our money is kept and be careful when we enter into important financial contracts. Finally, I hope that a positive effect that comes out of this giant mess is that Americans will learn to save again and realize that an economy held up by debt cannot be sustained.
Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors.
Wise Bread is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.