Event: US Finance Ministry announced to take over Fannie Mae and Freddie Mac on Sep 7 so as to prevent economy recession induced from real estate decline and sub-prime mortgage crisis.
According to its plan, US Finance Ministry will take Fannie Mae and Freddie Mac under governmental custody and supervision as well as replace CEO of the two institutions. Meantime, it will purchase mortgage loan securities held by the two institutions by Dec 31 2009 and mobilize the market. This plan was unanimously supported by the US and other bond holders like Japan and China, they believed this movement would help stabilize US financial market, relieve worries on US economy and bring positive influence on global economy.
Our analysis and estimation: Federal Government required Fannie Mae and Freddie Mac (GSEs) to purchase more real estate mortgage securities since Aug 2007, thus the two institutions increased top limitation of single housing mortgage from USD280,000 to over USD420,000; this induced increasing proportion of Fannie Mae and Freddie Mac (over 50% by end of 2007), which led to embarrassment this year.
Meantime, Fannie Mae and Freddie Mac affect credit and national image of the US. Now, many bond holders are equity capital owners from other countries, for instance, China, Japan and other oil-exported countries in Middle East are involved. If the problem of Fannie Mae and Freddie Mac can not be solved, America’s credit is to be affected and capital will probably flow out; this will deteriorate sub-prime mortgage crisis and even lead to economy recession.
The issue rooted from US real estate market. Viewed from current status, housing sales started to stabilize; hence future status could not be worse.
Earnings forecast and rating: Various kinds of movements have been put forward by Federal Reserve, SEC and US Financial Ministry to help housing loan institution and financial system in trouble after the sub-prime mortgage crisis. However, the situation deteriorated, thus Financial Ministry officially took over Fannie Mae and Freddie Mac. This indicated the ponderance of the issue as well as government’s attitude to save the market; besides, the action will likely enhance people’s confidence to dollar and strengthen the USD rebound. Steadiness has been shown after crisis assistance to the greatest housing loan company, however, has the real estate market reached bottom and mortgage crisis to finish or not, the answer is to be awaited.