Real Estate

Subprime Mortgages Injurious to Fannie Mae and Freddie Macs Health?

Written by Gaurav Bhola, MSM, Managing Editor & Community Manager on July 24, 2007 8:24 am EST

The mortgage industry is again in the throes of controversy, Freddie Mac and Fannie Mae, darlings of the mortgage markets may be facing financial discomfort in the future. So far, the two private-sector companies which are sponsored by the federal government have bought billions of dollars of subprime mortgage home loans this year.

However, they may not be resistant to the allergic sneeze of the housing market. Cumulatively the two companies own or guarantee 45% of all residential mortgages in the U.S. As big players they have assumed more risk by obtaining a substantial chunk of subprime home loans.

These mortgages, debt securities, and other illiquid loans may take a hit after Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund, valued at about $638 million and the High-Grade Structured Credit Fund, worth about at $925 million lost their value in July.

After gaining unimaginable value in the boom market, homes values are slowly descending from the stratosphere. The housing market is still in the doldrums. According to Countrywide Financial Corp. Chief Executive Angelo Mozilo, the housing market will not see a recovery before 2009. The market is dealing with tightening mortgage lender home loan and mortgage refinance practices, oversupply of homes which include foreclosures, stagnating home prices, and the residual effects of the recent boom housing years.

As home buying demand decreases, mortgage applications haves also followed suit. For the first time in four weeks, mortgage applications reached a five-month low that reflects a drop in demand for home purchase loans. According to the Mortgage Bankers Association (MBA), its seasonally adjusted index of mortgage applications week ending July 20 fell 3.6 percent to 609.0, the lowest point since week ending February 16 when it was at 606.6.

Consequently, given the current housing landscape, more trouble may lie ahead. This is certainly not fortuitous news for Freddie Mac and Fannie Mae. However, the state of the mortgage arena may be bad news for investors and shareholders who own the two companies mortgage-backed securities. It is not known what pile of mortgage rubbish Freddie Mac and Fannie Mae may have added to their balance sheets. Thus, they may not be well positioned to withstand even a harsh and protracted period of intensified credit risk. But they might weather the storm, in June the S&P 500 upgraded Freddie Mac’ rating from 3 stars (hold) to 4 stars (buy). Stranger things have happened.

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