Mortgage situation likely to get worse
Fannie Mae, Freddie Mac need capital
WASHINGTON — The crisis at Fannie Mae and Freddie Mac, once the unwavering giants of the mortgage finance industry, could make getting a home loan even more difficult and more expensive at a time when lenders are already tightening their grip on credit, industry experts and financial advisers said.
If you’re thinking of buying or refinancing a home, expect to see a rise in mortgage rates, the experts said.
But if you already have a mortgage, even one backed by Fannie Mae or Freddie Mac, you should have nothing to fear as long as you have no pressing need to refinance, they said.
A spike in rates could also drive homeowners into foreclosure as hundreds of thousands try to refinance out of adjustable-rate mortgages that are scheduled to reset this summer.
The crisis also could affect other forms of lending such as car and student loans.
“As people are already finding, credit tightness translates to the entire system,” said Michael Kitces, director of financial planning for Pinnacle Advisory Group in Columbia, Md. “A bank that loses millions of dollars on mortgage loans is a bank that has less money for loans for other purposes.”
What caused this latest panic in the already-crippled mortgage market? Investors have lost confidence in the two government-sponsored entities at a time when they need it the most. Badly bruised by the downturn in the housing market, Fannie Mae and Freddie Mac need to raise cash to stay afloat.
“It’s unclear what twists and turns this will take, but they have to raise capital,” said Keith Gumbinger, a vice president at HSH Associates, which publishes loan information. “In order to attract investors to buy bonds issued by a company that is struggling, they would need to offer higher yields. . . . That higher cost of getting capital would have to be passed along.”
A failure or government bailout of Fannie Mae and Freddie Mac could push mortgage rates above 7 percent for the first time in six years and delay a recovery in the U. S. housing market, according to some experts.
Home loan rates would go up by one percentage point if the companies failed because borrowers would have to pay private market rates, said Keith Gumbinger, vice president of mortgage research firm HSH Associates in New Jersey.
Even if the government steps in, rates could gain as much as a half a percentage point as the cost of selling mortgage-backed securities rises, he said.
Fannie Mae and Freddie Mac, which own or guarantee about half of the nation’s $12 trillion of home loans, have lost about half of their market value in the past week because of concern that the companies do not have sufficient capital to cover losses on mortgages they hold.
Meanwhile, Treasury Department officials were working the telephones Saturday with major banks to make sure that Freddie Mac will be able to sell $3 billion of its securities Monday in a previously scheduled sale that has now become a crucial test of investor confidence.
Though officials said they were optimistic the sale would be a success, anything less would pose new questions about how far the federal government will go to prop up Freddie Mac and Fannie Mae.
The turmoil may limit the companies’ role in reviving the housing market, said Mark Zandi, chief economist for Moody’s Economy.com in West Chester, Pa.
“We were all counting on Freddie and Fannie to step up and get the housing market rolling again, but they’ve been completely overwhelmed by the subprime tsunami,” Zandi said.
Rising foreclosures have already shrunk the pool of potential home buyers as lenders require bigger down payments and stronger credit histories from borrowers. Higher interest rates would keep even more people from buying homes that have been lingering on the market for so long. These are also dark days for anyone who has a stake in Fannie Mae or Freddie Mac. Shares of the companies plummeted last week on speculation of a government bailout. The turmoil shook the stock market and investor confidence. Financial planners said they have been fielding calls from worried investors.
“People are nervous. They really are right now,” said Christopher Brown, a financial adviser at Ivy League Financial Advisors in Rockville, Md.
Advisers recommend that you look at your portfolio to make sure you are not too heavily invested in any one area. Shift money around if need be, but don’t make any decisions based on fear. Try to stay the course, they said, and keep plenty of cash in reserves.
Bloomberg News contributed to this report.
