Does the housing market need Fannie and Freddie?

Investors in both Fannie and Freddie need to consider that both companies may disappear entirely.

By Jamie Dlugosch Apr 1, 2010 12:09PM

The mortgage securities market has been moribund since the collapse of the housing market and Wall Street in 2008.

 

That may change with news of a proposed $200 million private offering of securities backed by newly originated mortgage loans not backed by any government guarantees.

 

The high end housing market has been a lending black hole despite government backing for loans jumping to $729,750. As a result that segment of the market is still struggling with price declines and a lack of buyers.

 

 

It will be up to the private markets to save the day. If successful the sale will be a small step in healing what had been an important funding source for the real estate market.

 

Could this be the first small step to replace government guarantees entirely putting a dignified end to the Fannie Mae (FNM) and Freddie Mac (FRE) fiasco?

 

The stakes will be quite high.

 

Investors continue to buy and sell both Fannie and Freddie in large amounts. More than 20 million shares of Fannie trade hands each day. For Freddie the number of shares traded daily is more than 11 million shares.

 

Do the buyers of these shares understand the risks?

 

I don’t think they do because those risks are indeed quite high. Granted much of the action in both companies has more to do with short-term trading.

 

There are many buyers of Fannie and Freddie that do so in hopes that both companies survive in some form as to provide a reasonable if not a big return on a long term investment.

 

That outcome is the least likely.

 

Both of these companies have been hit by a hydrogen bomb leaving contamination that will last for many, many years. The only reason Fannie and Freddie survive as is today is because the government is afraid of the consequences of walking away.

 

The effort by Redwood Trust in selling securities without government backing should be the model for the entire housing industry. Doing so would put a premium on underwriting loans that are likely to be paid.

 

No government backstop is needed. That means investors can say good-bye to Fannie and Freddie stock as we close a dark chapter on American banking and finance.

 

We should all root for the success of the private market in selling mortgage securities.

 

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