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Freddie & Fannie Bailout Effects

Bailout The U.S. government took control of American mortgage giants Freddie Mac and Fannie Mae yesterday.  It was a massive bailout (maybe the biggest ever) designed to keep the companies solvent.  American taxpayers have now essentially become bankruptcy trustees for the two companies.

The move will help American homeowners because a failure of the “twins” would have made it significantly harder for them to get mortgages at decent interest rates.  Analysts also suggest the move will benefit Canada slightly.  The thinking is that liquidity should now improve in the U.S. mortgage market and bolster the U.S. economy. And naturally, Canada gains from a stronger U.S. economy.

Furthermore, a dark cloud of uncertainty has now been lifted from worldwide credit markets.  Market participants have wondered for months if Freddie and Fannie would implode under the weight of mounting mortgage losses.

More factoids…

  • Freddie and Fannie provide critical liquidity to the U.S. mortgage industry by buying mortgages from banks and reselling them as mortgage-backed securities to investors.
  • The two companies own or guarantee about $5 trillon of U.S. mortgages.
  • So far in 2008 Freddie and Fannie have backed over 80% of American mortgages.
  • Stock in the companies is now almost worthless.  Last fall FNM traded at $68 a share. Today it’s at $0.73.
  • BMO now expects U.S. home prices to stop falling as early as the first half of 2009.
  • “While we see some slowing of the housing market I don’t think we’re going to see any kind of mortgage crisis like we have in the United States.” – PM Stephen Harper via Reuters
  • How important is the U.S housing market to Canada?  Besides the many indirect economic benefits, Canada supplies about 1/3 of the lumber used to build American homes.