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Careful What You Wish For: Reforming Fannie and Freddie Will Slam Home Prices

Posted May 19, 2010 03:21pm EDT by Peter Gorenstein in Investing, Banking, Housing
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Fannie Mae and Freddie Mac are now multi-billion dollar money pits with an unlimited credit line from the U.S. government for at least the next two years. The government-sponsored entities asked for $20 billion after reporting massive first quarter losses, bringing their combined tab to shocking $145 billion.

As we’ve discussed with several guests in the recent weeks, in effect this unlimited credit line for Fannie and Freddie is essentially another bailout meant to help banks recapitalize their balance sheets.

As distasteful as this is, the alternative may be worse, considering the government backed 96.5% of all U.S. home loans in the first quarter. "There's not a real functional private market in mortgages right now," says Stan Humphries chief economist at Zillow.com. "It's kind of concerning in a capitalist country like the United States."

Fannie and Freddie reform needs to happen “sooner rather than later” Humphries says.

However, making those changes now -- just as the housing market tries to deal with the hangover from the expired home-buyer tax credit -- could create another leg down in home price, Humphries says. "Letting [reform] wait until later this year or early part of next year is a good thing for the housing market"  -- and your property value.

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