Solvency Of Fannie Mae And Freddie Mac A Major Concern
According to a former regional Federal Reserve President, the government sponsored mortgage agencies Fannie Mae and Freddie Mac are practically insolvent based on their current financial situation. It appears that it will grow increasingly difficult for the two companies to raise additional capital in the near future.
The company’s credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower.
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said.
The situation will probably grow worse for them in the short term as delinquencies and foreclosures have continued to climb in recent months as home prices keep falling. For any sort of recovery of the housing market to happen these two agencies will need to take a large part.
Mortgage rates have also started to creep up again and coupled with tighter lending standards from banks, demand remains constricted despite the number of relative bargains out there with the surplus inventory of homes. How much lower prices will fall remains to be seen but it is doubtful that economic growth will rebound until the housing market finally hits it’s bottom.
If they have to, the government will bail these agencies out as they fall under the category of “too big” to fail. With the two companies having a hand in about half of the $12 trillion mortgage market, a failure would cause financial chaos to ensue that would make the previous subprime collapse seem like a walk in the park.
