Foreclosures Spelling Doom For Freddie And Fannie

July 21st, 2008

Foreclosures have been the main reason for spelling doom for Freddie Mac and Fannie Mae. Henry Paulson, the Treasury Secretary of USA is quite firm about his stand regarding helping out these mortgage giants. His stand is that the shareholders should not benefit from the rescue plans according to Walls Street Journal. Paulson had taken a similar stand during the Bear Stearns bail out.

It is being predicted that early in the next week the Bush administration will intervene to save the duo. Freddie Mac is about to sell $3 billion short-term debts to test the demand in the foreclosure-ridden market for its securities. This move has been described as “thinly sourced speculation.” Last week Paulson clarified that the government had no scheduled programmes to nationalize Freddie Mac and Fanny Mae. Although supported by the government these two are privately owned. It accounts for half the mortgages in the country. The foreclosure crisis starting from the sub-prime melt down is said to have been triggered off by their failures.

Things have been going from bad to worse for quite some time. Thanks to the foreclosure crisis, their shares fell to a fraction to what it was a year ago. Fears gained momentum that Freddie Mac and Fannie Mae did not have sufficient funds to meet its commitments. This has already giving out the wrong signals for the economy to fall to the worst plight ever since the 1930’s depression.

Issues relating to house foreclosures, credit crunch, unemployment and the overall health of the American economy, dominate the forthcoming presidential elections in November.

Freddie Mac and Fannie Mac till last Friday continued to assert that their financial position was sound and that they could steer through the foreclosure-housing crisis. Government officials scrambled to echo these sentiments. It was a grave question in restoring confidence in the mortgage giants. The sudden fall in the share values raised fears that the government would launch rescue operation similar to what it did to save Bears Stearns in March this year.

One expert opined that the crisis stemmed from the fact that two such large mortgage funds had such a large say in the housing market of the country. Richard Bove categorically stated that Freddie Mac and Fannie Mae should be got rid off and replaced by new efficient bodies having more accountability and “without the distraction of the equity markets.”