The U.S. Treasury department is reportedly plotting to harness home-finance powerhouses, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), in a bid to tame the ever-slippery home prices – the root cause of the prevailing global financial crisis, according to popular analysis. The plan that is still in its infancy seeks to push down mortgage rates, and stimulate demand for new homes.
Bankers and analysts alike say that the plan springs from a latest issuance of government debt that would be used to purchase mortgage-backed securities from the troubled mortgage finance enterprises – Fannie Mae and Freddie Mac. The two firms that the government bailed out with $2 billion in September, would then avail the money to home lenders, on condition that they agree to give out mortgages at rates as low as 4.5 percent, down from the current range of 6.4 to 7.0 percent for a standard 30-year fixed-rate mortgage.
On a $500 000 mortgages for instance, the difference will amount to at least $300 a month, therefore enabling borrowers to afford larger loans; increasing demand and forcing the home values to go up.
The Treasury’s idea also means more money being injected into the ailing economy, and might therefore turn out to be a worthy remedy. However, it has since received its fare share of criticism. Some analysts see in the plan negligence for the people who desperately need assistance with debt and foreclosures. They say instead it appears to pay a particular attention to some creditworthy buyers. Foreclosures are nearing a 2.25 million mark this year, more than two-fold the average yearly level.
“The foreclosure rate remains too high... more needs to be done”, admitted Ben Bernanke, Chairman of the Federal Reserve, at a news conference last week.
Jack McCabe, CEO of the McCabe Research summed up the argument pointing out that a more cost-effective tactic could be focussing on helping existing home owners out of the bondage of foreclosure, implementing government programmes in helping borrowers cut down the principal and/or interest rate on existing loans.
| Borrowers Annual Income | Available funds for mortgage Interest per month | Annual Funds available for Mortgage Interest | Maximum Mortgage at 5.5% | Maximum Mortgage at 4.5% |
| $40,000 | $1,000 | $12,000 | $218,181 | $266,666 |
| $55,000 | $1,400 | $16,800 | $305,454 | $373,333 |
| $100,000 | $2,600 | $31,200 | $567,272 | $693,333 |
“If money was injected specifically into the banking system to write down principal on mortgages that would have a lot more impact than bringing down already low interest rates”, he said.
Stocks for both Fannie Mae and Freddie Mac have since declined into the pennystock category. On December, 4, Fannie Mae stock ended the day at $0.87 from a previous close of $0.84. Freddie Mac's stock lasted the trading session 1 cent better, at $0.88 from a previous close of the same ammount.
Resources:
1. http://www.ustreas.gov/
2. http://www.hotstocked.com/companies/f/freddie-mac-FRE-92770.html
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