The stock prices of mortgage giants Fannie Mae and Freddie Mac have dropped drammatically this summer, prompting the federal government to take the unusual step of making its support of the government sponsored enterprises explicit.

Why are the companies shares falling?

Investors fear they will collapse because of rising mortgage defaults driven by home price declines.

What are the default rates on loans held by the companies?

For Fannie Mae, 1.225 for single family loans delinquent 90 days or more, up from 0.62% for Freddie, 0.81% up from 0.49.  The figures are for April and were in the Wall street journal.

What happens if they collapse?

Mortgage rates will rise.

Will they collapse?

Not likely.  The office of Federal Housing Enterprises Oversight, the companies regulator, says Fannie Mae and Freddie Mac have enough capital to withstand  extreme conditions.

What if the extreme conditions  are realized andtheir capital runs out?

Then they will need to raise capital by issuing more stocks.  Given the belief that Fannie and Freddie will be backed by the government, the process of raising capital should be easy.

With mortgage rates low and a lot of seller inventory, now is the time to buy your first home or 2nd home in the Vail Valley.

Contact: gerlinde@gatewayland.com

www.gerlindevail.com

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