US mortgage giants' woes far from over

Aug 11, 2008

US mortgage giants' woes far from over

NEW YORK: Gaping losses at Fannie Mae and Freddie Mac are causing the two American mortgage giants to slow their purchases of home loans at a time when the United States government is counting on them to help prop up the housing market.

The reductions and associated measures that the companies are taking are likely to drive up home mortgage rates, which are near their highest levels in a year.

'Their decision to curtail support of the mortgage market is going to make mortgages more expensive for potential home buyers, which is going to hurt the overall economy,' said Fox-Pitt Kelton analyst Howard Shapiro.

'They're the only real buyers in this market, and they're going to buy less. That's really bad news.'

Concern over the companies' financial health was heightened last Friday when Fannie Mae reported a second-quarter loss of US$2.3 billion (S$3.2 billion). The deficit was three times what analysts had forecast and kept the company in the red for the fourth consecutive quarter. A day earlier, Freddie Mac had reported a US$821 million loss for the quarter.

In the light of their losses, both firms have indicated they will slow the number and types of loans they are purchasing. Fannie Mae will also begin charging more to guarantee loan repayments, a step that is likely to push mortgage rates higher.

Fannie Mae and Freddie Mac buy mortgages from banks and other lenders, providing those financial institutions with capital to make new loans. The companies own or guarantee more than US$5 trillion in mortgages, or nearly half of all home loans in the US.

Fannie Mae's poor results, in many ways, are a reflection of a declining housing market. But the poor results are also an indication of how much more limited the companies' options have become. As an extension, the US government's leverage over the housing market has also waned.

'The government has done a lot to help these firms, but mortgage rates are continuing to rise, and the housing market is continuing to decline,' said Credit Suisse analyst Moshe Orenbuch.

'They've become part of the problem as the government has to worry about them instead of relying on them to save everyone.'

Of particular concern are persistent rumours that one or both companies will require a bailout.

Last month, after the firms' stock prices plunged, Treasury Secretary Henry Paulson proposed an emergency plan that would give the federal government power to inject billions of taxpayer dollars into them if either seems likely to fail. He has repeatedly said he hopes he never has to act on the plan.

'The government wanted its bailout plan to be strong enough to calm the markets, but not so strong that they're forced to use it,' Mr Orenbuch said.

'But so far, it's been only partially effective. It's stabilised the companies, but it hasn't done anything to help the costs of new mortgages go down.'

NEW YORK TIMES