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FANNIE MAE, FREDDIE MAC - Backing By Fed Could Prevent Mortgage Funding Crisis!

NEW YORK FEDERAL RESERVE BANK CAN NOW LEND GIANT MORTGAGE GUARANTORS FUNDS TO ASSURE CONTINUED MORTGAGE FUNDING!

Together, two giant government-sponsored public corporations, Fannie Mae and Freddie Mac, back over half of all residential mortgages funded in the U.S.  Smooth operation, and adequate capital, is critical to fund new mortgages, and turn around the current housing market crisis we are experiencing in Chicago and elsewhere. Adequate reserve funding also assures Fannie and Freddie Stockholders, whose investments build the capital reserves each company requires.

Last week, on the heels of the failure of IndyMac Bank in California - a large mortgage provider of "stated income, no-doc" loans, dogged by escalating mortgage default, Fannie and Freddie lost over 40% of its share value.  Investment experts worried the lowered stock value of each company could scare away investors, dilute stock value, and necessitate a bailout by the U.S. Government.

The Fed's moves to extend credit to Fannie Mae and Freddie Mac, coupled with the U.S. Treasury's proposal to buy equity in either company if necessary, calmed investors feared, fueled a successful Freddie Mac Auction of $3 Billion of Short-Term Debt on Monday morning, and somewhat moderated investors' concerns on the stock of each company (though both were down slightly at the end of the trading day on Monday).

Fannie and Freddie were chartered by the Congress to support and stabilize the mortgage market.   Each company, however, is owned by shareholders.  However, their government affiliation has long allowed them to borrow at very favorable rates, providing needed capital to back mortgage loans by banks, and thereby supporting home owners. 

Too much financial support, however, could place taxpayer's money at risk, while supporting company value for shareholders.

A financial failure by either company could exasperate an already-troubled housing market - plagued by very high for-sale inventory, falling prices, fewer credit-qualified buyers, and escalating mortgage defaults and foreclosures.

Under the Fed and Treasury Department proposals, either Mortgage Guarantor would have access to a line of credit or an investment in equity by the U.S. Treasury.  The credit advance would be temporary in nature, but could last for up to 1 1/2 years.  Currently, each company's line is capped at $2.25 Billion - but this will most likely go far higher under the new proposals.

For more details, read Deborah Solomon and Sudeep Reddy's article in today's Wall Street Journal.

DEAN MOSS & DEAN'S TEAM CHICAGO

Posted: Tuesday, July 15, 2008 3:10 PM by Dean's Team

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