The Federal Government has announced that it has taken control of Fannie Mae and Freddie Mac, which own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt. They play a vital role in the U.S. economy by making fair and affordable mortgage loans available for home buyers and owners. They support the housing market by purchasing mortgage loans from the banks that originate them, giving the banks the cash to make more loans. They package those loans into securities and ensure repayment. They sell the securities to investors around the world, or retain them for their own portfolios.
The Federal Government's sweeping takeover of mortgage market giants is expected to have positive short-term benefits to the real estate market and opens the door for the industry to shape the restructuring of the companies.
Allowing either Fannie or Freddie to fail would hurt us all... Our ability to get home and auto loans, and even hamper economic growth and job creation.
What the Plan Involves
Under the Treasury Department's action, the two government-sponsored enterprises are placed in a government conservatorship and overseen by two government-appointed chiefs, former Merrill Lynch vice chairman Herbert Allison at Fannie Mae and former U.S. Bancorp CFO David Moffett at Freddie Mac.
Daniel Mudd, who led Fannie Mae for the last few years, and Richard Syron, his counterpart at Freddie Mac, have been relieved of their jobs.
The federal government is taking up to an 80 percent stake in the companies and will review their financial condition on a quarterly basis, injecting money into their operations as needed. The government is directing the companies to help stabilize housing markets by requiring them to increase their mortgage funding over the next year and a half.
For the long-term, the companies and their regulator, the Federal Housing Finance Agency, will begin planning for a major reorganization of their operations, away from their current 100-percent, privately owned model.
According to news reports, one of the models being discussed is something akin to a public utility, in which the government sets limits on the amount of annual return on equity to shareholders.
Positive Real Estate Impact
For the real estate industry, the short term impact is expected to be positive. With the government now explicitly backing the companies' mortgage obligations, the market for the GSE securities will be treated more like Treasurys, thereby exerting downward pressure on rates.
That will help drive a positive cycle of investment as investors return to the market, further lowering rates and generating funds to lenders to expand their mortgage loan operations. That is expected to help speed up housing sales in markets across the country and help stabilize home prices.
The main down side to the federal intervention will be felt by the companies' current shareholders, who will no longer receive dividend payments and whose holdings are diluted by the equity stake of the federal government.
— REALTOR® Magazine Online
Part of the Problem
At one point earlier this year, as the credit crunch worsened, the two companies were responsible for about 80% of all loans being originated in the U.S. But the rise of foreclosures weakened their balance sheets and raised their borrowing costs, reducing their ability to support the market. As the housing downturn worsened, the two companies came to be seen as part of the problem instead of part of the solution.
Technically, Fannie and Freddie have been placed under "conservatorship," a term that ordinarily means they are being stabilized with the objective of returning them to normal operation.
Taxpayers at Risk
It's impossible to say how much the effective takeover of Fannie and Freddie will cost taxpayers. If housing prices begin to recover and foreclosure rates don't get too high, the cost to the government could be very small or zero, because Treasury will earn a return on its preferred shares and get all its secured loans repaid.
Still, the deal is likely to draw criticism because it puts taxpayers at risk while boosting the value of Fannie and Freddie's bonds and mortgage-backed securities, which are held by banks and other investors around the world. Asian central banks, in particular, are large holders.
One group that won't be getting any kind of a bailout: Fannie and Freddie's ordinary common shareholders. They stand last in line for any money the two companies make. Share prices of both Fannie and Freddie have lost more than 90% of their value over the past year, in anticipation of a takeover. In after-market trading on Sept. 5, as word of the conservatorship plans leaked out, Fannie shares were trading around $5.50, down from $70 a year ago, while Freddie Shares were at about $4, down from $65 a year ago.
Candidates Weigh In
Senator John McCain, the Republican Presidential candidate, said at a rally in Albuquerque: "We need to keep people in their homes, but we can't allow this to turn into a bailout of Wall Street speculators." Doug Holtz-Eakin, McCain's top economic adviser, said that longer term, "We believe these institutions should not be making money" through government support. "They have to shrink to a point where they are not a threat, that they are not operating essentially as a big hedge fund."
Senator Barack Obama, the Democratic Presidential candidate, released a statement on Sept. 7 saying, "Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy." He said he wasn't yet ready to say whether Treasury's solution was the right one.
by Peter Coy and Theo Francis
Good news for Albuquerque
Believe it or not, in the future people will be buying and selling homes. Some of them will even make a profit.
It's not so crazy an idea. Consider Albuquerque, N.M. The mid-sized Southwestern city has experienced housing price declines since a peak in the third quarter of 2007, job growth has been flat, and housing starts are expected to fade by 45% through the end of 2008. Nevertheless, it's a city that home builders and economists are bullish about for 2010 and beyond.
According to analysts at Moody's Economy.com, Albuquerque's job growth through 2012 is projected at an average annual rate of 1.6%, fueled in large part by its low costs and local business expansion. Housing starts in the city are expected to reverse course in 2009, growing by 26.6%, according to the National Association of Home Builders (NAHB). This means builders have high hopes for 2010 and 2011, when those homes will be completed and on the market.
It's the same story in several other cities: more tough times to come in the short term, but potential for a recovery and a rise in prices in the long term.
Behind The Numbers
To determine where house prices are expected to rise next, Forbes.com looked at projections for housing starts from the NAHB and job-growth figures from Moody's Economy.com, for the 100 largest metro areas in the U.S. The estimates are based on the cost structures of business in the respective cities and the composition of the local economies.
Housing start projections from the NAHB may seem like wishful thinking, but the NAHB data are filled with laggards, signifying some realistic thinking. Housing starts in Las Vegas are expected to drop by 32% in 2008 and actually get worse in 2009, falling by a further 43%.
In overbuilt, highly leveraged Phoenix, starts are predicted to fall 50% this year and descend another 11% more in 2009.
Because houses take six months to two years to build, that means home builders aren't expecting profits in the Vegas or Phoenix market until past 2011.
"These are some of the most overbuilt markets," says Robert Denk, an economist at the NAHB. "There are some markets that got really out of hand and they're going to be in trouble for a couple years still." He cites Cape Coral, Fla., as the poster child of overbuilding exuberance. "They built 10 years of housing in two years." The prognosis isn't as bad elsewhere.
Texas On The Rise?
Centex, one of Texas' largest homebuilders, has been stung by overextension into Michigan and Colorado, as well as big bets on the vacation-home market in Texas. In July, the builder reported losses of $150 million.
There's a bright spot, however.San Antonio and Austin, Texas, have largely avoided the real estate crash, with price increases of 2.5% and 4.1% in year-over-year terms, respectively, according to the NAR. This is driven in part by the fact that the two markets are expecting building slowdowns of 24.7% and 28.2%, respectively, through the end of the year, as home builders are bearish about the remainder of 2008 and 2009 in the sales market or cannot find financing. Builders as a whole are taping their wounds and cutting back production, adopting a wait-and-see approach to home prices in the coming year.
But for the start of 2010 and into 2011, builders expect a more vibrant market for sellers. For homes built in 2009, which would come off the conveyor belt in 2010 and 2011, the NAHB forecasts a 9.6% increase in Austin and a 20.9% increase in San Antonio above 2008 levels. Much of that has to do with expected job growth in all non-farm sectors.
Recovery In Obvious Places
At this point, it's clear the subprime contagion won't be contained in the next year, based on the acceleration of home price drops and foreclosures nationwide. But when the bad vintages of loans finally come off the books, the cities where prices are expected to rebound are largely those with vibrant economies.
"The logic is pretty straightforward," says Mark Zandi, chief economist at Moody's Economy.com. "People will spend as much on housing as their income will allow them. House prices are very closely tied to household income over the long run when you look at business cycles."
This means that recovery is likely in the cards for even the hardest-hit spots. Cities like Atlanta and Colorado Springs, may be reeling from high defaults and foreclosures, but from 2007 through 2012, their economies are expected to experience 2% and 1.6% average annual job growth. That means more in-migration and more money in the economy, factors that help businesses grow and profit--and put more money in residents' pockets.
As local economies grow bigger and more dynamic, land values increase because the value of what can be produced on that land increases. When land prices go up, home values go up.
Home prices moving up; it sort of makes one nostalgic.
Brandon DENT : (505) 550-6388
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