"You've Caught the NET!"

The U.S. Secretary of the Treasury, the Federal Reserve Board, and The President consider Fannie Mae and Freddie Mac key to turning around the real estate market downturn nationwide.  Should these two government-sponsored Mortgage Investors and Guarantors fail, the result might be tragic for the U.S. Economy, and the housing market's chances for recovery soon.

Under the Fed and Treasury Department proposals, either Mortgage Guarantor will now 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.

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 Mae and Freddie Mac currently back over half of all residential mortgages funded in the U.S.  Smooth operation, and adequate capital, is critical to fund new mortgages.  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.

Playing out the worst possible option here, investors in Fannie and Freddie would flee to other investments, capitalization of these two mortgage giants would decrease, as would their ability to buy and guarantee as much mortgage volume.  The pool of available mortgage money would decrease, and mortgage rates would increase - further exasperating the current sluggishness in the U.S. Housing Market.

See our post Tuesday @ BlogChicagoHomes.com for more information, as well as a link to Deborah Solomon and Sudeep Reddy's article in yesterday's Wall Street Journal.

DEAN & DEAN'S TEAM CHICAGO