What if they held a wake and nobody came.
That’s what it seems like as we watch Fannie Mae and Freddie Mac thrash around. The two mortgage giants have fallen about 90% since last Summer. Still, they’re involved with over half of all the mortgages originated in the country.
The market is worried that with housing prices declining more and more homeowners will find themselves upside-down on their mortgages and just turn in the keys. If that happens, Fannie and Freddie’s capital may be wiped out. That was the basis of last week’s sell-off.
But mortgage performance has actually been just fine. The Agencies used appropriate approval standards and didn’t put people into loans that they couldn’t pay. That’s why the default rate for prime loans is so much lower than non-agency loans. Indeed, S&P recently wrote that the market turmoil has not affected the Agencies’ excellent credit.
Nevertheless, fears of cascading failures have slammed the entire financial sector. Because the sector seems so fragile, we probably won’t see much Fed action very soon.
Douglas R. Tengdin, CFA
Chief Investment Officer
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