The Fallout From the Fannie Mae, Freddie Mac Takeover

So it has been a week since the feds came in and took over Freddie Mac and Fannie Mae. While it will obviously take some time to know the long term repercussions I wanted to look at some of the immediate reactions to the move.

First let's look at the reaction from the media and the general public. One would expect there to be some political fallout from the largest takeover in government history. But because of the election and Hurricane Ike the reactions have largely been muted. There have been of course the expected positive reactions that this was a shrewd move to help the real estate market and negative reactions that the government should limit its involvement. But for the most part their has not been a big reaction one way or another. I have actually seen more stories about the reactions on the takeover from the presidential candidates than stories simply about the takeover.

While the media reaction has been muted the reactions in the financial markets have not been. Not surprisingly, the stocks of Fannie Mae and Freddie Mac plummeted after the announcement. The government said before hand that the common shares of Freddie Mac and Fannie Mae would lose most of their value in the event of a government takeover. So following the news of the takeover the share promptly lost 80% of their value.

The mortgage markets have reacted very favorably to the news. Considering the Fed has cut interest rates multiple times this year mortgage interest rates have remained relatively high. The reason for this was that banks were unsure about the financial stability of Freddie Mac and Fannie Mae which provides insurance for about half of the residential loans issued in the United States. This risk has now been lowered since the government takeover. Consequently mortgage rates have plummeted in the last week. 30 Year mortgages have dropped from 6.35 to 5.93. This is after rates have moved down from 6.63 to 6.35 partially on expectations that Fannie Mae and Freddie Mac were going to be taken over. I have seen some reports that this is lowest rates have been in the last 4 months. I think this understates how low rates have come down. Besides two brief drops at the beginning of 2008 this is the lowest rates have been since 2005.

The lower interest rates should have a positive effect on the real estate market. Lower rates pull down the mortgage on a house and tend to have a positive effect on real estate values and market activity. In another positive sign although their has not been too much media coverage the coverage that has come out has been mostly positive. To be honest I was a little surprised by this. I would have expected the coverage to be a little more mixed. But regardless the favorable media reaction combined with lower interest rates should help the real estate market. And based on what I have heard from different realtors their does seem to be an upswing in activity. But we won't have any hard data on this for a month or so.

So, at least in the short term, it seems the Feds have accomplished their goals of helping the real estate market with the Freddie Mac and Fannie Mae takeover. We will of course have to wait over the next few years to see if this move turns out to be wise. But for now the Fed has finally been able to push down mortgage rates.

Ki is a real estate broker working in the Austin real estate market. He maintains a website with a Austin MLS search