Home Loan Wholesale

Fannie Mae and Freddie Mac own or guarantee about half of the nation’s home loans totaling around $5 trillion, have been ailing for months. The bailout plan, which calls for the government to inject up to $100 billion in each of the U.S.-sponsored mortgage financiers to keep them operating, was in response to the roughly $14 billion of combined losses over the past year.

“These companies are so big and so interwoven into the financial markets and our financial system, we had no choice,” Treasury Secretary Henry Paulson said Monday in a round of TV interviews. “A failure by either one of these companies would cause great havoc in the economic system.”

Fannie, Freddie and the Federal Housing Administration (FHA) now account for backing or issuing roughly three-quarters of the nation’s mortgages, with commercial banks playing a decreasing role since the start of the housing-credit crisis.

Unfortunately, the bailout announced last Sunday hasn’t done much for easing other credit concerns. There is growing worry about other credit problems leading to more big losses and write-downs at banks and other financial institutions in the months ahead.  The latest data on the job market shows that unemployment rate shot to a five-year high in August and payrolls are being cut at an alarming rate. Unemployed people can’t pay bills, which could possibly lead to a surge in defaults not only in mortgages, but also other bills like credit cards and auto loans.

“There is no silver bullet here. This is certainly a positive step, but is not the absolute answer,” said Mark Zandi, chief economist at Moody’s Economy.com. “They’ve made progress in residential mortgage assets but have yet to deal with other problematic loans.”

New data released Monday by the Federal Reserve show that consumer borrowing on credit cards grew at an annual rate of 4.8 percent in July, up from a growth rate of 3.5 percent in June. But, payments on those cards have fallen despite the $106.7 billion Americans received from the economic stimulus package. Card payment rates fell 6.2 percent on a year-over-year basis in July, the ninth consecutive monthly decline.

More and more, economists are talking about an emerging “negative feedback loop,” whereby a slowing economy generates higher credit losses at banks, which leads to more restrictive lending, weakening the economy even further, and round and round. “It’s already happening,” says New York University Prof. Nouriel Roubini. For an economy already struggling to grow, the result could be the nastiest recession in a generation.

“Credit availability is needed before housing can recover,” says Vince Farrell, chief investment officer of the Soleil Group in New York. But, credit isn’t going to be available unless these credit concerns can be addressed.