Wednesday, September 10, 2008

Fannie/Freddie Takeover

Over the weekend, the government announced that Fannie Mae and Freddie Mac were placed in conservatorship. This means that the two companies will temporarily be run by their regulator, the Federal Housing Finance Agency. The Fannie and Freddie Boards and Executive Officers were replaced, but employees were encouraged to stay. The stated objectives of this action were to stabilize the mortgage market, insure the availability of funding for new mortgage loans, and insure that new mortgages are affordable.
While a conservator will have control over Fannie Mae and Freddie Mac, product availability and day to day operations for the origination of mortgages are expected to continue uninterrupted and essentially unchanged. Fannie and Freddie are expected to increase the number of mortgages they own this year and next year, before reducing their portfolios beginning in 2010. Fannie and Freddie together own or guarantee roughly half of the $12 trillion in outstanding mortgage debt, and they are currently responsible for about 75% of all new mortgage originations, so the viability of the two companies is essential for an efficient mortgage market.
As a result of the takeover, the government now explicitly guarantees the obligations of Fannie and Freddie securities. This has removed uncertainty and increased the demand for mortgage securites. Both domestic and foreign investors had recently reduced their purchases of mortgage securities, and they are now expected to be comfortable stepping up their purchases again. Mortgage rates reacted favorably to the news on Monday.


Also Notable:
The government will provide up to $200 billion in capital to Fannie and Freddie
The government will own 80% of Fannie and Freddie
The US Treasury will begin purchasing mortgage securities issued by Fannie and Freddie
Foreign investors own more than $5 trillion of Fannie/Freddie debt and mortgage securities

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Weekly Market Activity Report Week Ending September 8, 2008

Like Adam West as Batman, the market for home sales in the Twin Cities went POW! during the week ending August 30. For the week, there were 965 purchase agreements signed—a whopping increase of 51.3 percent from the same week last year. That's the highest year-over-year increase in pending sales since we began tracking that figure on a weekly basis in 2004. Home-buying activity is particularly heavy relative to last year due in all likelihood to a) the historically sluggish showing in August of last year as the credit crunch took hold, b) a bevy of buyers taking advantage of the final days of FHA's seller-funded downpayment assistance program, which sunsets on October 1 of this year and (c) new home buyers getting off the fence and taking advantage of the new home buyer tax credit of up to $7,500.
This week's edition of the MAAR Weekly Market Activity Report features updated figures for several key metrics. Days on Market Until Sale dipped slightly to 143 but remains up from last year by 5.8 percent. The Percent of Original List Price Received at Sale increased slightly to 92.7 but remains down from the healthier levels of the past several years. The Housing Affordability Index increased to 151, thanks to falling prices and interest rates.
The Months Supply of Inventory fell to 9.9 months. This means it will take the current crop of properties for sale approximately 9.9 months to completely sell through, given current sales rates. This is dead-even with this time last year, another indication that the market isn't continuing to shift in the buyer's favor anymore for the time being. A balanced market is thought to have a 5- to 6-month supply rate.

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