- The Washington Times - Friday, July 25, 2008

Fannie Mae in the wake of the ongoing housing crisis and credit crunch.

Reaction to the announcement, predictably, was varied. Most analysts immediately interpreted it as a government bailout, while Fannie and Freddie executives played down the announcement, insisting the two government-sponsored entities (GSE) were sound and well-capitalized enough to withstand the continuing crisis.

The proposal includes three steps. First, it raises the line of credit the two GSEs have with the Treasury Department, increasing available liquidity. Second, it gives the Treasury Department authorization to purchase their stock to ensure the GSEs have “sufficient capital to continue to serve their mission.” Third, it provides the Federal Reserve Bank with authority to oversee their operations.

Fannie and Freddie collectively own or guarantee $5.2 billion in home mortgages - almost half the outstanding mortgages in the country. Government chartered but publicly owned, Fannie and Freddie have been able to borrow money at lower rates than what may be found on the open market. These lower rates are then passed on to banks, which pass them on to American homeowners.

Though there has been debate as to how much savings actually is passed on to the borrower, it’s pretty clear that Fannie Mae/Freddie Mac loans carry lower rates. Before the credit crunch, “nonconforming” loans - those with balances that exceed the Fannie/Freddie limit of $417,000 - typically were 0.25 percent to 0.375 percent lower than “jumbo” loans not purchased by the GSEs.

Since the credit crunch, Wall Street investors have lost their appetite for residential-mortgage-backed securities, resulting in a sharp increase in jumbo mortgage rates. I see that as of this writing, a “conforming” 30-year fixed-rate loan purchased by Fannie Mae or Freddie Mac is hovering around 6.25 percent. A nonconforming jumbo rate is exceeding 7.50 percent.

Mr. Paulson’s announcement is ominous. Clearly, his intention was to calm markets and restore confidence in the two giant GSEs. He’s basically saying this: “Don’t worry; we won’t let Fannie and Freddie go under.”

Though the federal government surely has the power and ability to make such bailouts - it has done it before - the mere notion that these behemoths are in serious trouble is a scary sign that the housing crisis and credit crunch may be a long way from being over.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@ pmcmortgage.com.

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