Mortgage bailout won’t pull US out of the drain?

Fannie Mae and Freddie Mac story comes a long way when you’re talking about America’s biggest mortgage giants. After its recent law-change-affecting-itself in July, how would it affect the US economy? Will it even succeed or get it done halfway?

Fannie Mae

Fannie Mae – America’s secondary mortgages giant

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs) that are privately owned, but receives financial support from the Federal Government. Fannie Mae and Freddie Mac account 9 out of 10 secondary mortgages in America, and owe or guarantee about $5.3 trillion in an overall rough figure of mortgages. Initially, Fannie Mae and Freddie Mac are supposed to ensure that financial institutions in the US are funded enough to be able to offer low home loan rates. In their own words:

Fannie Mae has a federal charter and operates in America’s secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America. (About)

Will their collateral damage ‘hobble’ the economy and property like what The Star News reports, or will it just be like what home loan consultants have predicted – Economical slide down of the property market due to outside factors not within the Malaysian region?

The Star Newspaper tells you all.
The Star News Reports:
WASHINGTON: If the government bailout of Fannie Mae and Freddie Mac is a salve to help heal what is ailing the U.S. economy, it is likely to be a slow-acting medicine that may not stop the infection before it gets worse.

Analysts predict the vicious cycle where housing, credit and financial problems force Americans to hunker down further – hobbling the economy and in turn aggravating those very troubles – won’t be easily broken.

“The negative psychology has become embedded and will take time to unwind,” said Brian Bethune, economist at Global Insight.

“It is not instant coffee.”

Many are expecting the government’s action will have faster relief when it comes to mortgage rates, however.
The national average interest rate for a 30-year fixed rate mortgage dropped 0.3 percentage point to 6.04 on Monday, according to financial publisher HSH Associates.

The decline in mortgage rates may provide an incentive to prospective home buyers and for existing homeowners to refinance into more secure, fixed-rate loans, but it won’t be a quick cure-all for the crippled housing market.

Builders, reeling from the record-high foreclosures and a glut of unsold homes, will keep cutting back for the foreseeable future, which will continue to be a major drag on national economic activity.

And, home values – people’s biggest asset – likely will keep sinking.

When Freddie Mac reported second-quarter earnings in August, chief executive Richard Syron said he expects home prices nationwide to fall 18 percent from peak to trough, according to its measure. Syron, who is being replaced at the helm of Freddie Mac, said the market is only halfway through the descent.

Home prices for the 20-city Standard & Poor’s/Case-Shiller index peaked in July 2006. Some economists predict prices won’t recover until mid-2009 or later.

That, along with rising unemployment and shrinking paychecks, means consumers probably will retrench, dealing a blow to the economy.

A growing number of analysts believes the economy will be thrown into reverse in the final three months of this year and perhaps in the first three months of next year, meeting a classic definition of a recession.

“It would be a mistake to think there would be any immediate, or short-term, impact for economic growth,” said Bethune.

He is among those analysts in the camp that the economy will contract in the fourth quarter of this year and the first quarter of next year.

“It will take time for the government to execute its plan and for worldwide markets to be comfortable with it,” he said.

Howard Chernick, economics professor at Hunter College, predicts: “The U.S. economy will continue to spiral down.”

The economy shrank late last year and barely budged at the start of this year. Growth picked up in the spring, thanks to brisk exports and the government’s tax rebates, which energized shoppers at home.

But that rebound wasn’t expected to last.

Slower growth overseas will probably cause exports to fall off just as Americans are cutting their spending and the benefits of the rebates disappear.

“The economy will flatline,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
He predicts the economy will stall out – logging no growth during the fourth quarter of this year and the first quarter of next year, rather than actually contracting.

“But it’s a close call, he acknowledged.
“It is going to be a tough period.”

A deteriorating jobs market figures prominently into the dismal outlook.
The nation’s unemployment rate zoomed in August to 6.1 percent, a five-year high, as employers axed jobs for the eighth month in a row.

So far this year, 605,000 jobs have disappeared.
The situation will get worse before it gets better, analysts predict.
Hundreds of thousands of more jobs probably will be cut through the rest of this year; another half million may be lost during the first quarter of 2009, according to some projections. There are those who predict the unemployment rate could climb as high as 7 percent by the fall of 2009.

High prices for energy, food and other things are taking a bite out of paychecks, another factor weighing on consumers, whose spending is a major shaper of overall economic activity.

“Consumer psychology is pretty much at rock bottom,” said Hoffman.
Businesses will stay in a cost-cutting mode until they start to feel confident that the economy has truly turned a corner. “On the margin, the government’s action makes the housing environment a little better and should be helpful in mending credit woes but it is not going to turn around the economy,” said economist Ken Mayland of ClearView Economics.

Despite the poor economic outlook, the Federal Reserve is expected to hold rates steady at 2 percent, a four-year-low, when it meets next Tuesday.
The Fed stopped cutting rates in June out of fears it would aggravate inflation.
Before the Fed moved to the sidelines, it had carried out its most aggressive rate-cutting campaigns in decades to shore up the wobbly economy.

Still, Fed Chairman Ben Bernanke and other Fed officials have warned that the country will be stuck in an economic rut in the months ahead as businesses and consumers work through all the problems. – AP

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