Nationalisation May Shore Up Us Housing Market

The dramatic nationalization of US mortgage giants Freddie Mac and Fannie Mae should help to put a floor under the weak US housing market that was the cause of their problems in the first place.

US house prices have been falling for about three years and are now down by 25%-30%. The pace of decline has shown signs of easing recently, but figures out as recently as Friday showed why the US treasury secretary, Henry Paulson, moved swiftly to take the two lending giants into "conservatorship" at the weekend.

The Mortgage Bankers Association said that the number of mortgages entering the foreclosure process jumped to 1.2% in the second quarter of the year, the first time since records began in 1979 that the figure had exceeded 1%. The share of mortgage loans overdue by 30 days or more rose to 6.4% and almost a quarter of them were prime loans, showing that the problem is spreading well beyond the sub-prime sector where the downturn began. In addition, 9.1% of single-family homes were in foreclosure or more than 30 days overdue, up from 6.5% a year ago and the worst figure for 39 years.

"These numbers are mind-numbing. The MBA data released on Friday provided added impetus for a quick response to this latest chapter of the mortgage crisis. [But] the government continues to react to events because they have been unable to get ahead of them," said David Rosenberg, US analyst at Merrill Lynch.

He said that the US government's cash injection and support for the mortgage-backed securities market, in which the two government-sponsored enterprises (GSEs) were so heavily involved, should help the two giants to lend mortgages at lower rates of interest and support the housing market. "Now that they have been taken over, the GSEs will be able to fund mortgages at a cost that is practically indistinguishable from Treasury rates. This is the real benefit from the takeover."

Brian Bethune, chief US economist at Global Insight, said that mortgage rates should fall soon. "While the takeover is bad news for existing shareholders, it will be good news for American households who are either looking to purchase a home for the first time, or refinance their existing mortgage."

The latest report on US house prices by Global Insight last week showed that the speed of decline in the US housing market slowed in the second quarter and prices were down less than 5% from a year ago.

No one is yet talking about rises in prices although there is now hope they may find a floor as a result of the nationalization. But with US unemployment still rising fast, many homeowners are still handing back the keys, and few analysts are ruling out further house price falls.