Doug Marshall
Market Assessment
Published September 8, 2008

The other foot has finally dropped. What many experts were expecting to happen has happened quietly over the weekend. The two lending giants, Fannie Mae & Freddie Mac, are being taken over by the Treasury Department, at least temporarily.

This move by Treasury represents the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago.

As many have said in recent months, Fannie & Freddie are too large and too important to the credit markets to let them go down in flames. Intervention was the only real option unless of course you wanted to risk the very real potential of an economic meltdown.

The move by Treasury was precipitated by the steady rise in U.S. home mortgages that were either overdue or in foreclosure.

The latest survey by the Mortgage Bankers Association indicated that over 9% of all home mortgages in the country were at least a month overdue. That is up from 6.5% a year earlier and is the highest since the MBA began such a survey 39 years ago.

Fannie and Freddie guarantee more than $5 trillion in mortgages and have incurred combined losses of about $14 billion over the past four quarters. As loans continue to default, Fannie and Freddie losses continue to mount requiring more capital infusions to stay solvent.

The question that affects those of us in the commercial real estate industry is whether Fannie and Freddie will continue to lend on apartments. Although the default rate on commercial real estate is quite modest, estimated at less than 0.2%, no one knows for sure whether they will continue apartment lending.

A quick search on the internet did not uncover any clues on what Treasury will do with the comparatively highly successful apartment lending programs.

In related news, Kerry Killinger the chief executive officer of Washington Mutual was ousted today. WaMu’s stock price, already at a precipitously low price, plummeted another 12% as the news was announced of Killinger’s firing.

We aren’t through the crisis yet. Stay tuned.

Sources:
Frank Confirms Treasury Intervention To Shore Up Fannie Mae, Freddie Mac
by Deborah Solomon and Damian Paletta, The Wall Street Journal

Foreclosures, Overdue Mortgages Increase Again by James Hagerty, The Wall Street Journal