What will happen in wake of bailout

By Alan J. Heavens<br />Inquirer Real Estate Writer<br /><br />If you were hoping to retire on your Fannie Mae/Freddie Mac stock portfolio, you’ll need another plan quickly.<br />Had you postponed house-shopping until fixed rates slid below 6 percent, you can start looking now – rates on 30-year fixed mortgages fell to as low as 5 7/8 percent yesterday – but only if your credit is impeccable and your price range is at or below the conforming loan limit of $417,000.<br /><br />Waiting for home prices to drop further? That will continue to happen, though probably not at the pace of the last two years.<br /><br />Looking for a home equity loan or line of credit, or a jumbo loan? No effect, said Holden Lewis of Bankrate.com, because those loans “are not owned or traded by Fannie and Freddie.”<br /><br />Foreclosures? An unrelated issue, he said.<br /><br />Those, according to analysts, are ways “nationalization” of the mortgage market will likely play out in the next few months, except that it will cost U.S. taxpayers $200 billion, depending on how much capital these companies will require through a secured-lending facility designed to provide “liquidity.”<br /><br />With “several bold strokes,” the government has taken the issue of Fannie and Freddie solvency off the table, said Brian Bethune of Global Insight, the Lexington, Mass., economic-forecasting firm.<br /><br />So what will this cost, and who will pay?<br /><br />Investors should have seen this coming, since shares in both government-sponsored enterprises had fallen more than 80 percent in the last year. Fannie closed Friday at $7 and Freddie at $5.09. Yesterday, Fannie ended the day at 73 cents and Freddie at 88 cents.<br />Credit Suisse analysts yesterday cut their stock targets to $1 a share for each. They had been forecasting $10 for Fannie and $8 for Freddie before the takeover.<br /><br />Their certificates weren’t shredded, as they would have been had Fannie and Freddie gone into usual receivership. But preferred shareholders will take a big hit, and those with common stock will lose everything, said Moody’s Economy.com chief economist Mark Zandi.<br /><br />James Lockhart, director of the now-in-charge Federal Housing Finance Agency, reminded shareholders Sunday: “Market discipline is best-served when shareholders bear both the risk and the reward of their investment.”<br /><br />Oh, and don’t expect any dividend checks.<br /><br />Federal officials say only a limited number of smaller institutions have holdings in Fannie or Freddie shares that are significant compared with their capital, so damage will likely be relatively light.<br /><br />But at least one regional bank, Sovereign Bancorp of Reading, took a hit yesterday. On a day when most banking stocks rose due to the bailout, Sovereign shares closed down nearly 7 percent, to $9.02.<br /><br />Before the bailout announcement, Sovereign had valued its holdings in Fannie and Freddie at $588 million. President and CEO Joseph P. Campanelli said the bank could survive the exposure.<br /><br />”In the event that Sovereign was required to write off this entire investment, and was not able to record a tax benefit for the loss, Sovereign’s capital levels would still exceed the levels required to be considered well-capitalized,” he said in a securities filing.<br /><br />Who will benefit?<br /><br />The takeover was designed primarily to turn Fannie and Freddie debt into government debt, which global capital markets would be more willing to buy. That will increase the amount of funds available to the primary mortgage market.<br />In addition to promising $200 billion in capital if necessary, the government now holds about $1 billion of senior preferred stock in each company, and it pledges to buy $5 billion in mortgage-backed securities.<br /><br />Now holding all the cards, Uncle Sam will be first in line to get its 10 percent dividend.<br /><br />Commerce Bancorp chief economist Joel L. Naroff suggests that prospective investors look past today’s events to the future.<br /><br />”Fannie and Freddie investors have some hopes that five years or more out, their positions will have some real value,” he said. “This should help the stock markets, and if it accelerates the housing recovery, it should boost financial stocks.”<br /><br />Bethune agrees.<br /><br />”This impact has to be weighed against expected market-to-market gains on $5 trillion in outstanding debt and guarantees,” he said.<br /><br />”How these competing effects will play out in the markets and the economy is difficult to say, but the net impact on financial sector shares is expected to be positive in the short-term,” according to Bethune.<br /><br />You’ll not see much sympathy for investors or for the folks at Fannie and Freddie, who critics say squandered millions on lobbyists and on wining and dining lenders that would have been better spent on infrastructure.<br /><br /><span style=”font-weight:bold;”>Fred Glick, a Philadelphia mortgage broker, said he once served on something called the Freddie Mac Loan Prospector Advisory Committee.<br /><br />”We, as a group, came up with many ideas. Yet the real reason we met in places like New Orleans and the Ritz in suburban Washington was to promote their agenda,” Glick said. “They sent an armada of their people to the meetings and never really considered what we had to say.”</span><br /><br />How does this affect the consumer?<br /><br />There will be more mortgage credit available, and that will reduce concern about getting enough money to buy a house, meaning price declines will slow.<br />That is more important to sellers and buyers than rates, said Cheryl Miller of Long & Foster Real Estate in Lower Gwynedd.<br /><br />Miller said her discussions with sellers have centered on current home value versus prices five months ago.<br /><br />That value has declined, “not because of the availability of money to qualified buyers,” Miller said, but because prices of comparable houses are declining, and “that’s something that appraisers cannot ignore.”<br /><br />The takeover will end the need to lure leery investors with a gigantic spread between rates and Treasury yields to protect their investments – 265 basis points compared with the historic average of 170, Zandi said.<br /><br />To guarantee that spread, Freddie Mac last week was charging borrowers 6.35 percent. That spread has begun to drop already – bringing the rate down to 6.08 percent yesterday, and it could fall enough to bring rates “well below 6 percent,” Zandi said.<br /><br /><span style=”font-weight:bold;”>The spread is “nuts,” said Glick. “Rates should really be in the low 5s.”</span>

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