This could spell trouble for homebuyers
by Colin Lovett – PIC Current Producer
Two more leading financial giants are in trouble this week. Shares of Fannie Mae and Freddie Mac plunged in trading on Wall Street Friday morning after reports that the government may be planning to take over one or both of the companies, which serve a critical role in the U.S. housing market.
U.S. Treasury Secretary Henry Paulson has tried to reassure nervous investors by saying, “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission”. It’s not clear yet if this will calm nervous traders on Wall Street.
The danger for the U.S. economy is that Fannie and Freddie are so large and play such a critical role in the housing market, which has already been suffering from dropping prices and a rising number of foreclosures. But those problems are also what are driving the problems at Fannie and Freddie, which secure almost half of all U.S. home loans.
They are private companies which guarantee trillions, yes trillions, of dollars in mortgage debt. What they do, essentially, is serve as insurance for most mortgages in this country by taking a fee from lenders in exchange for guaranteeing that loans will be paid even if borrowers stop making their monthly payments. The problem is the rising number of foreclosures, which are putting pressure on the financial giants.
If either of these companies collapse, it could be a huge blow to the already reeling housing market and the larger U.S. economy. Without the security offered by Fannie and Freddie, lenders will be much more cautious about making loans to homebuyers. It could also cause rates to jump and drop the amount of money available for lending. Stay tuned to see how this plays out. It could be resolved quietly, or it could have a profound impact on our economy.
[...] learn more about Fannie and Freddie and the problems they face, click here to see our previous [...]