Fannie and Freddie to be taken over by the US Govt.

A historical developement in the United States today. Fannie Mae and Freddie Mac, two of the largest Govt.backed conpanies whose porfolio included about 50% of the US housing market, was going to be taken over by the US Govt.

As we all know the entire financial mess that we had to witness over the last year or so had its roots in the US housing market. Just to give a very brief history of the problem in simple terms - People kept buying properties more so as investments to see the values rise in the short term and then make a killing by selling the properties. This was being fecilitated by poor banking procudures whereby several banks would pass loans to undeserving applicants with imperfect credit history. However, as the value of the purchased properties were rising so astronomically the banks were sure that even if the applicants defaulted on the loan they would be able to sell the mortgaged property and still make a profit. The banks made millions of such deals. They then bundled up several such loans, few of which were to the deserving and few subprime (not deserving) and sold them to bigger banks and financial institutions across the world.

The bubble burst all of a sudden when the US economy showed signs of slowing down. Fresh purchase of property was not as strong as it had been. This back fired on one and all involved in the system. Lack of buying led to property prices declining thereby resulting in defaults by those who couldn't afford the loss on their property and couldn't afford to repay the banks as well. The banks in turn were left to deal with their losses and the biggest chunk of such a loss was being borne by the bigger banks and financial institutions. It was a ripple effect.

Once bitten, twice shy goes the saying. Over the last year banks have obviously been over cautious in sactioning new loans due to which several deserving applicants have also been denied loans for new houses. Needless to say, the housing market collapsed and property prices have plunged.

The scenario has changed in view of this turmoil. There is a good portion of people who are waiting to buy their new properties but hoping for a further decline in prices to make that purchase. Interest rates are at their lowest level in years. The time is ripe for a rebound. All the market needs is a trigger. AND THAT TRIGGER IS HERE !

STABILITY in home prices is what everyone fears. With Fannie and Freddie's the US Govt.has sent a signal that they will not let the US Housing industry collapse any further. Mortgages will be offered at lower rates than before and investments will be protected. I see the US Housing industry stabilize from hereon. It is inappropriate to assume that prices would see an immediate rise and everything would be back on track by tomorrow morning's coffee. The housing problem is a huge problem and will take time to come back on its feet. However this is the bottom.

Hopefully, we would see new purchases commencing, which would result in new constructions in a few quarters. There would be job creation as the US housing industry was a big source of jobs in America. The added jobs would generate more spending which would rub off on other industries and the economy as a whole would be in a much better shape.

I give the US treasury secretary Paulson a two thumbs up for a very proactive role in dealing with an issue of such magnitude.