Questions about the bailout of Freddie and Fannie

How will the bailout of Freddie and Fannie affect first time home buyers and the home market? There will be a big infusion of cash into the banking industry, $200 billion. That means banks will have plenty of money to lend. The bailout is not designed to help the housing market directly. However, if the money infused into the banking industry is used to fund home mortgages, the housing industry will be positively affected. First time homebuyers are in a good position because housing prices as well as interest rates are expected to continue to decline.

Will the bailout fix the foreclosure mess? This infusion is not to bail out individuals who are in foreclosure. There are more than 1.2 million foreclosures nationwide and those numbers are expected to continue to rise. Individuals facing foreclosure should not look for bailout money to come their way. People facing foreclosure should deal directly with their lenders and attempt loan modifications (also called loan workouts or loan reworks). The bailout’s purpose is to bring stability and credibility back into the banking market.

Why should the government bail out Freddie Mac or Fannie Mae or any other bank? Freddie and Fannie hold or guarantee more than 50% of the nation’s mortgages. This adds up to over $5 trillion. The nation’s financial market cannot sustain that kind of loss. If the government does not intervene and lets Freddie and Fannie collapse, the economy here and abroad would collapse along with them. The business model of these mega-institutions is in question. There is confusion as to whether these institutions are government institutions or privately owned. They are “government sponsored enterprises.” The involvement of government in publicly traded businesses is being criticized by economic experts like Treasury Secretary Henry Paulson.

Will investors in Fannie and Freddie lose their investments or will they get it back from the government? The stock prices of these companies have dropped more than 90% in the last year. Because Fannie and Freddie are publicly traded, investors assume the risk when they put their money in. The investors are already losing dividends, but if the bailout saves the companies and they are able to recover, the stockholders will re-coop their losses. The key for the small investor is to diversify. Some stocks will do better than others in the current economic climate.

Is now a good time to get a second mortgage? Fannie and Freddie do not underwrite second mortgages. The institutions that do fund second mortgages are probably not going to be affected by the bailout one way or the other. Now is as good a time as any to get one.