The Housing Market Could Totally Collapse

According to Fortune nearly half of all of the country's outstanding home loan debt is owned by or guaranteed by either Fannie Mae or Freddie Mac.  $5 trillion dollars worth of mortgages, and these two government-sponsored enterprises are in serious financial shape and could fail.

The problems with the two agencies are already causing a loss of confidence with investors, and it is making housing loans harder to come by.

The two companies are hybrids or sort.  Fannie Mae was created by Congress in 1938 and Freddie Mac was created by Congress in 1970.  The mandate for both is to maintain a market for mortgages by buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid. This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.  However, the companies are also publicly traded, with the usual mandate of trying to maximize profits for shareholders.  Their efforts involves risk, and as quasi-government programs there is an implicit guarantee that the feds wouldn't let them fail.  As a result, the market and rating agencies have always treated these two as bulletproof.

Each company has borrowed billions directly from the United States Treasury.  Because of the government involvement they have had  a AAA credit rating and could borrow at low rates, which is a benefit they need in order to loan money.  As a result, they have piled on risks without a capital cushion to cover it.  It has not help that like Enron and other companies Fannie Mae has been found to have overstated its earnings and Freddie Mac has been found to have overstated its profits.  Their stock value has recently fallen by 47%.

The question is if these two giants start to founder, how much will it cost the government to bail them out, and whether they are bailed out or not, how much of the surrounding economy will the two take with them if they fail.

It is interesting to talk about and speculate about these issues, but the truth of the matter is that these events would impact real people.  It will undoubtedly lead to more ordinary people needing to file bankruptcy to save their homes.  If the companies sell off debt or obligations, it will lead to harsher collection activity.  This will undoubtedly lead to automatic stay and discharge injunction violations.  So, it is a very real problem.