Economist's Commentary: May 6, 2008

Quick Take on the Economy: May 6, 2008

By Lawrence Yun, NAR Chief Economist

Fannie Mae recorded a larger than expected loss in the first quarter.
Fannie Mae and its rival Freddie Mac will continue to record losses over the next few quarters due to their exposures to subprime loan holdings.
Why in the world are Fannie and Freddie holding these risky loans? The bulk of loan purchases are in prime loans for which they are earning profit, but both are required by law to purchase a certain percentage of loans from low-income neighborhoods (where subprime lending has been prevalent). As with any organization, exposures to subprime loans are leading to losses.
Fannie can provide more liquidity to the marketplace with more capital. It can get more capital if OFHEO (its regulator) relaxes the capital reserve requirement. That will help Fannie participate more actively in the prime loan market and with its profit. It can also get more capital from new stock issuance. It does not want to but is being forced to. That will help Fannie participate more actively in the prime loan market and help with home sales, but it will hurt Fannie's stock price as its profits will be shared with a greater number of shareholders.

Quoted mortgage rates are at near-historic lows. However, Fannie and Freddie have been adding on surcharges and requiring a higher down payment in many markets classified as "declining." Lenders, in turn, are also imposing similar standards in order to sell their loans to Fannie and Freddie.
NAR is fighting the blanket "declining" market policy. Capital providers certainly should properly assess market risks. But sound, credit-worthy borrowers should not be hampered by new tighter rules in light of the fact that Fannie and Freddie were set up to provide the public mission of stabilizing mortgage funding and not solely for profit interest of their shareholders .
The blanket tighter lending rules over the interim will hold back housing market recovery and the economy.

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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