Mortgage Industry Shudders as Fannie Mae & Freddy Mac Scramble

Posted on July 11, 2008
Filed Under economy, mortgage |

I will not even begin to comment or predict what may happen but I firmly believe that however this comes out in the wash, it will affect our financial futures. Former Federal Reserve Chairman, William Poole’s comments in a Congressional hearing have fueled fears that the mortgage giants may be failing. Mr. Poole stated that the government may need to bail them.

In subsequent testimony, both Ben Bernanke and Henry Paulson testified that both companies reserves were in excess of the requirements and that they were “working through this challenging period” but neither would speculate on what the consequences would be of either a government bailout or the failure of either or both companies.

Jon Ogg at 24/7 Wall Street takes a look at the impact that these giants have on not only the mortgage industry but the entire financial system. He states

But think about the ramifications if one of these or both of these actually failed. If you thought a Bear Stearns meltdown would have caused a panic, “you ain’t seen nothing yet” sure comes to mind. It isn’t that the lending institutions would be changed for future mortgages. The ramifications for the entire financial system would be at risk. Imagine if all the outstanding debt issuances, mortgage-backed securities, CMO’s, and other pieces of paper widened out to massive spreads over treasuries. You would have write-down waves at banks, brokers, insurance companies, credit unions, every pension system, mutual funds, and private money managers. It would effectively destroy more value in just about every portfolio that exists.

The mortgage industry which pretty much depends on Fannie Mae and Freddie Mac loans is in a wait and see mode and not sure they want to read the news on Monday morning. I personally hope that the Congress will pull the white rabbit out of it’s bag of tricks and we will see some stability on Monday morning. I’m not even sure what to hope that the white rabbit is anymore and will be interested to hear any comments on what others think the Congress should do.