Mortgage Banking

Making sense of commercial real estate finance.

Can the Government help you?

Posted by Jordan Crouch on July 15, 2008

Yes. If you are Fannie Mae or Freddie Mac, the government can make good on its promise to bail you out. Both Fannie and Freddie are government sponsored entities (GSE) meaning that even though each is a private company, the government will guarantee the loans bought by the companies.

So what happened?

As Fannie bought loans for a dollar, they quickly became worth 50 cents because of the sub-prime “meltdown”. These are exaggerated numbers but you get the idea of what is happening. Fannie and Freddie were losing money; this became more and more clear as the companies’ respective stock prices tumbled. Fannie dropped from $30 a month ago to just above 8 this morning. This pulled the entire stock markets down, with the DOW dropping below 11,000 for the first time in two years. Seeing this transpire, Henry Paulson, the Treasury Secretary, announced plans to make good on the ‘government sponsored’ promise.

What’s the plan?

Mr. Paulson, with the help of the President, Congress, and others, has a three part plan.

Step One: to increase the line of credit for the GSE’s with the treasury department. Meaning if they need more capital, Fannie can use its credit card to pay.

Step Two: if its need the Treasury (i.e. the government) will purchase equity in either Fannie or Freddie; another way to get more capital to the GSE’s.

Step Three: to give the Federal Reserve an oversight role over the GSE regulator’s process. Huh? Basically to help make policies, recommendations, and keep the GSE’s out of trouble. Since the Federal Reserve controls the proverbial cookie jar, seems only fair that they have a say in how the GSE’s are run.

Will it work?

There have been 266 major USlending operations that have ‘imploded’ according to ML-implode.com. The most recent being IndyMac Bank last week. Banks that remain active are still seeing their shares plummet, even with the Fed’s plan being released two days ago. So will this 3 part plan save the GSE’s and the mortgage industry? Only time will tell.

What does this have to do with commercial real estate?

It’s true that Freddie/Fannie are primarily residential lenders, but both companies provide mortgages to multi-family projects as well. This sector of the business has not seen the massive defaults that residential homes have. Therefore, MF lending should continue to be a strong earner for the two. It’s also worth noting that for the last six months, the majority (more than 50%) of the MF lending across the US has been done by Fannie or Freddie. They have been dominating and gobbling up market share. When all of this craziness blows over Fannie or Freddie will still be there.

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