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Daily Real Estate News  |  September 8, 2008  |   Fannie, Freddie Takeover Keeps Mortgages Flowing
The federal government's sweeping takeover of mortgage market giants Fannie Mae and Freddie Mac is expected to have positive short-term benefits to the real estate market and opens the door for the industry to shape the restructuring of the companies.

The NATIONAL ASSOCIATION OF REALTORSŪ commended the Treasury Department's decision, which it said will bring much-needed stability and continued liquidity to the nation’s mortgage market.

"This demonstrates that the government is clearly committed to keeping the flow of capital uninterrupted, which is crucial to the housing sector and the economy," NAR President Richard F. Gaylord said in a statement Monday.

Fannie and Freddie own or guarantee almost half of the country's $12 trillion in outstanding home mortgage debt.

"Fannie Mae and Freddie Mac play a vital role in the U.S. economy by making fair and affordable mortgage loans available for home buyers and owners," Gaylord said. "Their critical mission must not be interrupted, and Sunday’s announcement goes a long way in making sure that does not happen."

What the Plan Involves

Under the Treasury Department's action, the two government-sponsored enterprises are placed in a government conservatorship and overseen by two government-appointed chiefs, former Merrill Lynch vice chairman Herbert Allison at Fannie Mae and former U.S. Bancorp CFO David Moffett at Freddie Mac.

Daniel Mudd, who led Fannie Mae for the last few years, and Richard Syron, his counterpart at Freddie Mac, have been relieved of their jobs.

The federal government is taking up to an 80 percent stake in the companies and will review their financial condition on a quarterly basis, injecting money into their operations as needed. The government is directing the companies to help stabilize housing markets by requiring them to increase their mortgage funding over the next year and a half.

For the long-term, the companies and their regulator, the Federal Housing Finance Agency, will begin planning for a major reorganization of their operations, away from their current 100-percent, privately owned model.

According to news reports, one of the models being discussed is something akin to a public utility, in which the government sets limits on the amount of annual return on equity to shareholders.

Positive Real Estate Impact

For the real estate industry, the short term impact is expected to be positive, says NAR Chief Economist Lawrence Yun. With the government now explicitly backing the companies' mortgage obligations, the market for the GSE securities will be treated more like Treasuries, thereby exerting downward pressure on rates, he says.

That will help drive a positive cycle of investment as investors return to the market, further lowering rates and generating funds to lenders to expand their mortgage loan operations. That is expected to help speed up housing sales in markets across the country and help stabilize home prices.

The main down side to the federal intervention will be felt by the companies' current shareholders, who will no longer receive dividend payments and whose holdings are diluted by the equity stake of the federal government.

Looking ahead, the directive for the companies and their regulator to start work on their long-term restructuring opens the door for NAR to help shape that process, and the association already has a process underway to do that, say NAR legislative and regulatory affairs analysts.

— REALTORŪ Magazine Online

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