Weekly Focus
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Renewed pressure on US housing market
Mon, Aug 25 2008, 07:15 GMT
by Danske Research Team
In the past week the news has once again been domi-nated by troubles on the financial front. In particular, attention has focused on problems at US mortgage lenders Fannie Mae and Freddie Mac, which currently account for around 75% of all mortgage lending in the US and therefore play a vital role in the country's hous-ing market. These two GSEs have suffered substantial losses on their holdings of mortgage bonds and are under huge pressure to raise new capital. When they came under the spotlight earlier in the summer, the US government was obliged to step in with an explicit guarantee that it would inject money if necessary. The purpose of doing so was to restore confidence in both GSEs so that private investors would put money into them.
However, investor interest still remains very limited, increasing the likelihood that the US government will have to honour its guarantees and inject public money into both GSEs. This has hit their respective share prices hard as such action could dilute the value of ex-isting shareholders' investments.
This situation is particularly crucial for the US econ-omy because it could exacerbate the housing market situation. If the ability of both GSEs to buy mortgage bonds is restricted by a shortage of capital, this would further decrease the availability of mortgage financing, even for good payers. This would in turn dilute the ef-fect of the Federal Reserve's substantial easing of monetary policy earlier this year, and emphasise the problems involved in getting monetary policy to make a difference where it really counts. Latest housing mar-ket data also give cause for concern, suggesting a re-newed deterioration after a measure of stabilisation had begun to look imminent.
Published on Mon, Aug 25 2008, 07:23 GMT
Archive
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