On Sunday September 7th the US Government took control of government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Both agencies had made fundamental mistakes over the past year that led to Treasury Secretary Paulson’s need to overhaul the organizations. The Treasury Secretary focused on three goals:
- Providing stability to financial markets;
- Supporting the availability of mortgage finance;
- Protecting taxpayers
What does this mean for credit unions and our members?
1) Mortgage rates have fallen by about 50 basis points. This should lead to more affordable housing. Many expect this should cause housing price appreciation of 3%. Though the worst in terms of housing price decline may not be behind us, this should inject some activity into the markets. In the short term this should help credit unions originate mortgages, and may in some areas help loan to value ratios. This could also help protect non-agency MBS and debt as housing prices could stabilize.
2) Preserving liquidity in the mortgage market. In many ways the GSE’s were created to provide liquidity to lenders to spur mortgage originations. By allowing the GSE’s to grow 10% per year this should not create increased capacity, but should allow for liquidity to remain. Because credit unions do have balance sheet capacity, this could be an opportunity to grow on balance sheet mortgage positions.
3) Investment portfolio restructuring. The government’s actions reinforces the credit of senior GSE debt and are positive for agency debentures and agency guaranteed MBS. To the extent the government’s actions achieve Secretary Paulson’s goal of supporting the availability of mortgage finance, non-agency MBS may benefit from reduced expectations for home price depreciation and additional refinancing options for homeowners.
While there is still uncertainty in the markets, many credit unions are using this event of opportunity: an opportunity to help members afford homes; an opportunity to rebalance an investment portfolio; and finally an opportunity to access a stable secondary market. While it may be some time before we see the full extent of the crisis, it will be important for credit unions to think about the new opportunities it has created.