Observers: Bailout of Fannie, Freddie needed, but it won’t end crisis

The federal government’s takeover of Fannie Mae and Freddie Mac was a much-needed move to restore some confidence in the shaky financial industry, but it is unlikely to provide a major short-term boost to the local housing industry, according to interviews with bankers, brokers, builders, home buyers and sellers.

A cross section of people involved in metro Atlanta’s housing market applauded the U.S. Treasury Department’s action a week ago. In a historic move, the agency put the two government-chartered companies under conservatorship and pledged up to $200 billion to offset their future losses.

The decades-old companies act as key middlemen between mortgage lenders and investors, creating investment securities as a way to free up lenders’ capital and lower the cost of borrowing for home buyers.

But while the takeover has ended worries about Fannie’s and Freddie’s immediate survival and driven down mortgage interest rates, it won’t end the financial crisis that has wracked the nation. Formidable challenges remain, industry participants and experts said. There are too many unsold homes still on the market, which could be flooded by even more foreclosures in coming months.

“It’s a small step in my mind, because the bigger thing is supply and demand,” said Richard Martin, associate professor of real estate at the University of Georgia’s Terry College of Business. As of July, he noted, the nation had an 11.2-month supply of homes on the market, according to statistics from the National Association of Realtors. Even with a boost in demand spurred by lower mortgage interest rates as a result of the bailout, it could take many months to whittle down that inventory, which tends to hold down home prices.

What’s more, the bailout of Freddie and Fannie may have done little to address another underlying problem — lending standards that have become much tighter over the past year as the credit crisis has deepened. Even with lower interest rates, would-be home buyers still may have difficulty qualifying for a loan, said Joe Brannen, president of the Georgia Bankers Association.

“None of this has anything to do with underwriting criteria for mortgages. None of that has changed,” Brannen said. “I’m not hearing anybody say the impact is going to be dramatic or immediate.”

Meanwhile, home sales have slowed dramatically. Would-be buyers are worried that the weak economy is threatening job security and could drive home values down further.

“I would not purchase a home or make any major investments in 2008,” said Jason Leiba, who was at first tempted to buy a home after moving to Atlanta last year from Orlando. But the 32-year-old operations manager for the World of Coca-Cola said he shelved those plans because of the sour economy and uncertainty around the upcoming presidential election.

“I may look at purchasing a home in mid-2009,” he said.

To be sure, the historic takeover of the two largest players in the nation’s mortgage business was looking increasingly essential to avoid a deeper crisis.

Fannie and Freddie, which were created by the government in 1938 and 1970, respectively, to foster wider homeownership, hold or created securities backed by more than $5 trillion in mortgage debt. That accounts

for roughly half of the nation’s outstanding mortgages.

But as plunging home prices and the firms’ own missteps into underwriting riskier mortgages threatened to wipe out Fannie’s and Freddie’s capital, their securities dropped in value. Foreign central bankers — including those in China, a major investor in the agencies’ debt — also increasingly raised concerns about expected losses at the two companies, according to media reports.

“I think it was a move that had to be done,” said Will Yowell, with commercial real estate firm CB Richard Ellis. He said jitters were likely to spread into other markets the longer that Fannie and Freddie’s health remained in question. “Liquidity, that’s the key thing. … This will help in a lot of ways.”

David Ellis, executive vice president of the Greater Atlanta Home Builders Association, said he’s “very encouraged that we have a very stable mortgage market going forward.” A collapse of either firm would have had a “devastating effect” on the already struggling residential real estate market.

Indeed, the bailout is already paying dividends: mortgage interest rates immediately dropped almost half a percentage point to 5.8 percent on a 30-year fixed mortgage, according to Bankrate.com. That could encourage more people to begin shopping for homes or refinance higher-cost mortgages. For instance, the drop in rates cut roughly $50 from the monthly payment on a $200,000 mortgage.

Rick Floyd, former president of the Mortgage Bankers Association of Georgia and owner of Opteum Mortgage in Atlanta, said news of the bailout prompted a flurry of phone calls from potential customers.

Still, he cautioned that it will take some time for mortgage sales volumes to recover from roughly a 30 percent decline this year.

“Obviously it’s not just interest rates. People have to feel good about the economy,” he said.

For McDonough real estate broker Donna Tidwell, the Fannie-and-Freddie deal brings hope in an industry reeling from foreclosures, bad loans and no clear end in sight.

“I’m concerned about the government having stepped in when our deficit is already so huge,” Tidwell said. But she welcomed the move. “Without [the bailout], the economic world as we know it will not turn and it absolutely has to turn. The people in Washington know that, and that’s the reason they had to do it.”

Tidwell said she has been grappling with the worst housing market of her two-decades career, and she has even begun advising some potential clients to rent their houses out rather than taking heavy losses in a declining market.

“Prices continue to fall. So it’s not a pretty thing right now,” she said.

Even though he doesn’t expect dramatic results from the bailout, Brannen with the Georgia Bankers Association said he welcomes the move because it will stabilize the secondary market for mortgage loans, making it easier for banks to sell their mortgages and free up cash for other uses.

“If we can’t sell loans in the secondary market, we won’t make them,” he said. “We’re going to be fine, but it’s going to take a while to work through the inventory [of unsold homes] because a lot of … people don’t qualify anymore,” Brannen said.

What happens next?

The bailout has also left a cloudy future for the two government-spawned companies. If they shrink or combine as some expect, it’s unclear who or what might fill their mammoth shoes in the mortgage industry.

Under the terms of the takeover, the Treasury Department — and thus taxpayers — could end up owning almost 80 percent of Freddie and Fannie. Regulators took over management of the two companies. The federal government hasn’t yet invested any money in the two companies, but it will chip in as much as $100 billion in each if later losses would otherwise make the firms insolvent.

Meanwhile, to keep mortgage business flowing, the government also committed to buy up to $5 billion in mortgage-backed securities and extended nearly unlimited lines of credit to both firms.

But it’s unclear what Freddie’s and Fannie’s future roles will be. Under the bailout’s terms, both agencies must slash the size of their mortgage portfolios by roughly two-thirds by 2020.

“Unless there’s Wall Street banks ready to step in … essentially [Freddie and Fannie are] going to be buying fewer loans in the future,” said Martin, with the University of Georgia’s business school. “Unless someone steps into the gap, it could mean loans are harder to get in the future.”

But with a presidential election looming this year, a fight on Capitol Hill over the fate of Freddie and Fannie is brewing.

Republicans have long wanted the firms privatized and perhaps broken into smaller companies. Democrats are likely to push for some continued role in the mortgage market for some version of the companies.

“In a way, they didn’t do much. They bought time,” Martin said of the bailout. “There’s still a lot of decisions to be made about what they’re doing.”