The Trickle Down Effect From Fannie and Freddie

The United States government takes over Fannie Mae and Freddie Mac to save the markets from potentially trillions of dollars in bad mortgage paper overwhelming the markets. For starters, there is great debate about government bailouts in general using taxpayer dollars to bail out the rich. The Federal Reserve stepped in on Bear Stearns, and basically loaned the money to JP Morgan to acquire Bear Stearns, in a sweetheart deal by guaranteeing the Bear’s bad paper. Now the  government’s takeover of Fannie Mae and Freddie Mac will costs taxpayer’s into the billions; and the cost will end up being a heck of a lot more than the estimates that are being thrown around now.

What does this mean to consumers that need credit to secure home mortgages? What does it mean to credit card users? The U.S. Treasury Plan calls for Fannie and Freddie to reduce the size of their portfolios by 10% a year starting in 2010 until they reach 250 billion. Who will buy all of their mortgage paper - and for what price? This will guarantee an additional supply of mortgage paper hitting the markets for years to come. Consequently, according to legendary investor Jim Rogers, who called the whole situation, “a mess” stated it will harder to get a mortgage, and  that this bailout will ensure that housing prices will continue to go down. Credit cards may also be harder to obtain, and credit limits slashed until banks can get total control of their balance sheets.

Right now most banks want a 700- 720+ credit score to receive the best mortgage rates available. It looks like that will continue to be the norm because there is very few buyers for mortgage paper that isn’t the highest quality. Gone are the days of people buying the million homes with the true ability to buy only a three to four hundred thousand one; people are going to have to really be able to afford the house that they are buying.   In addition to having a strong credit score, consumers will also be faced with having to also put down greater amounts of equity. Even though mortgage rates initially dropped a quarter point after the bailout announcement, it will take time to see how the Fannie and Freddie bailout will influence the U.S. economy and individual consumers over the long-term as it reverberates through the financial system.