Last Updated Jun 15, 2011 4:13 PM EDT
Like nearly all mortgage lenders, Fannie and Freddie are grappling with huge losses stemming from the stagnant housing market and a glut of foreclosed homes. Freddie Mac reported a loss of $8.7 billion for the first quarter of this year, while Fannie Mae has borrowed roughly $100 billion from the public since 2008.
So how will the mortgage lending behemoths begin to recoup these losses? According to Anthony Sanders, a scholar at the Mercatus Center and a real estate finance professor at George Mason University, a steep interest rate hike may be imminent. The Professor observes, "Part of the Fed's argument for keeping interest rates low â€" the cheap money rally â€" was to stimulate the housing market, and it just isn't working."
Sanders believes that the jump in rates may take a couple of years to materialize, but in long run, it may be the best move for everyone: lenders, borrowers, and moreover, the fiscal health of the United States. He says, "The rest of the world is looking to us to solve our budgetary problems. As other nations observe that we're incapable of cutting our spending, they are going to raise the interest rates on our financing. Once we start asking serious money for loans, we'll start attracting capital back in."
The Professor is quick to point out that even before the late 2007 burst of the housing bubble, Americans were enjoying low interest rates unparalleled at any other period in history. While this may have worked fine during the first half of the last decade, when credit was easy to come by and the U.S. enjoyed unchallenged status as the world's largest economy, the picture in 2011 is decidedly different. At this point, Sanders believes "If [Federal Reserve Chairman] Bernanke and his colleagues are relying on inflation to help the housing market, they should look elsewhere. Go ahead and raise rates."
The real problem with the housing market, as the Professor sees it, is not interest rates at all, but rather an issue that most politicians on Capitol Hill seem content to ignore â€" continued levels of high unemployment. People without jobs, or those who feel insecure in the jobs they have (an increasingly large majority of the population) will not invest in real estate. Sanders puts the case rather bluntly: "Nothing will happen with a rise in interest rates. What will ultimately drive housing prices going back up will be reducing unemployment. End of story."
What do you think it will take to get the housing market back on its feet?
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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and The Equifax Personal Finance Blog, and is Chief Content Strategist at RealtyJoin.com, a community for real estate investors.