Fannie Mae, Freddie Mac End Game?

Mortgage Market Upheaval

The most significant financial development the last few days -- certainly for the housing market -- is the accelerating decline of Fannie Mae and Freddie Mac. At $5 and $3.5 per share, respectively, the two so-called government sponsored entities ("GSE's") would appear to be caught up in parallel death spirals (both are down more than 90%(!) in the last year).

What does that mean for housing? No one really knows yet.

The answer likely depends on the government's next move(s) -- and how the credit markets receive them.

If the U.S. Treasury effectively nationalizes them -- continuing to provide funding -- it's possible that the average home buyer or seller won't notice any change. However, the reason Fannie Mae and Freddie Mac arrived in such dire straits is because they became overextended and undercapitalized. Simply perpetuating those problems, without any underlying reform, would only serve to transfer any future losses from the companies' investors and creditors to U.S. taxpayers.

So some type of fundamental change is likely -- and needed.

What's ultimately at stake is who originates mortgages, who holds them -- and at what interest rate.