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Fannie, Freddie Can't Stop Housing Freefall

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Looser guidelines fail to create market floor.

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Fannie Mae (FNM) and Freddie Mac (FRE) aren't turning out to be the housing saviors Congress hoped they'd be.

In an attempt to lower mortgage rates and bolster plummeting property values, Congress recently expanded the reach of the two government-sponsored entities (GSEs) to include so-called jumbo mortgages. The plan, pushed through despite heavy criticism, allowed Fannie and Freddie to enter the market for loans beyond their previous limit of $417,000.

Regulators hoped that the GSEs would use this massive influx of cash to thaw the frozen housing market, jumpstarting lending and bringing interest costs down for struggling borrowers. Much to the chagrin of both bureaucrats and real estate lobbying groups, Fannie and Freddie opted instead to improve their own financial condition, rather than that of the American homeowner.

Bloomberg reports that the GSEs used looser lending restrictions and lower capital requirements to buy their own mortgage-backed securities, buoying prices and soothing their ailing balance sheets.

The National Association of Realtors -- the trade group which aims to single-handedly save the housing market through the sheer inaccuracy of its upbeat forecasts -- predicted that the GSEs would buy $150 billion of jumbo loans this year. Analysts at UBS put the figure at only half that number. Recent data from Fannie and Freddie indicate that both predictions will be above the mark.

According to Bloomberg, jumbo mortgages accounted for almost 30% of the $2.4 trillion in new mortgages last year. Freddie estimated it would purchase a mere $10-15 billion in jumbo loans in 2008, and Fannie hasn't yet offered an estimate. Both GSEs claim to be helping their markets, but the aggregate effect of their actions will probably be marginal at best.

Despite being virtually the only remaining source of liquidity in the mortgage market, Fannie and Freddie are simply too weak to create the unnatural market floor Congress hoped they could. Fannie and Freddie's respective stock prices took another beating yesterday, and are down almost 30% since the announcement of their new, looser guidelines.

Earlier this year, as the GSEs followed the likes of Citigroup (C) and Merrill Lynch (MER) into the write-down abyss, Professor Depew and others at Minyanville argued that regulators were paving the way for their eventual nationalization.

Nationalization doesn't typically bode well for shareholders.

With housing market conditions continuing to worsen and with no end in sight, investors should seriously be asking themselves what will happen if the GSEs are indeed brought home to Washington.
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