Assetz® News - Fannie and Freddie's great rescue

Fannie and Freddie's great rescue

8th September 2008 |

As the country where the credit crunch began as the sub-prime crisis unfolded, much if not most of the US has been seen as a bad news story for property in recent months, even if the tumbling house prices in California and Florida have contrasted with the 4.9 per cent in Oklahoma and other pockets of optimism identified by Knight Frank's global property price survey.

This being the case and given the waves of credit crunch gloom that have rolled out from their American epicentre around the world, it has come as a relief that the US government has undertaken to spend hundreds of millions of dollars in all but nationalising two of its largest and oldest mortgage lenders, Fannie Mae and Freddie Mac. These semi-autonomous bodies had underwritten over half of the mortgages in the country, so had their recent problems pushed them over the edge the consequences for the US economy - and in turn that of others - could have been severe.

By bailing out these two firms, the Bush administration may have done more than avert a problem for his successor as president. The confidence that may be gained from having the US government underwrite and protect a huge chunk of its mortgage market could have many positive ramifications for property investors, guaranteeing mortgages now and increasing the funding available to the firms in the next couple of years.

While this by no means spells the end of the credit crunch, the action could at least stop it becoming significantly worse, improving the prospects of recovery for areas such as the Gulf coast and, by extension, for those investing there.

Moreover, the early response of the money markets around the world has indicated a positive and optimistic response. With Asian markets gaining during early trade today, Merrill Lynch's head of Asia debt origination, Hong Kong-based Jon Pratt, told Bloomberg: "This may be the jolt that will help restore long-term confidence among credit investors and it shows the government is willing to do what is necessary to keep the markets functioning."

Also telling the news agency that the US administration's actions had been helpful was head of investment strategy at Daishin Investment Trust Management Co. in Seoul Kwon Hyeuk Boo, who said: "The U.S. government has shown its firm intention to fix the problem and this will help ease the credit crunch."

In London too, the markets have rallied, as Graham Neale, a spokesperson for private stockbrokers Killik & Co, had told the BBC they would. He said: The markets are certainly going to rally today because investors are going to say 'Maybe we can see light at the end of the tunnel in terms of the credit crunch'."

So while it may be just the beginning of the end, the actions taken to save the two US firms could mark a critical turning point in the liquidity crisis. If this really is the beginning of the end for the credit crunch, property investors may be able to look at both the US and a range of other overseas markets with renewed optimism.

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