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Stocks for commercial estates real-estate companies was faced with challenges for some time but the government come to its aid after a decision to take over mortgage giants in the market Fannie Mae and Freddie Mac. This was great joy to investors though after some time they began thinking of the long-term effect of the action in the market (Hudson, 2008).
Government decided to intervene to stabilize the reeling agencies after the investors had pushed up the stocks of real estate investment trusts. Many of the investors gained from this action since previous years drop in stocks, after the government intervention the REIT index retreated started to retrieve back to its position (Elston, 2008).
The takeover on the other provided support for credit markets in short term but this is not an excuse for the long term concerns that are there, for instance increase of debts or deterioration of economic conditions. Though the government intervention may have negative long-term effects there are certain groups that benefited from it. It is likely to benefit many REITs that specialize in buying of mortgage securities that are guaranteed by Fannie and Freddie. On the other hand it is not clearly understood how the action will affect the multifamily REITs that depended on Fannie and Freddie for financial support over the years (Hudson, 2008).
The groups that benefited from the action included residential mortgage REITs that gained 13.8 percent, stocks of apartment companies gained 5.5 percent. Though they gained for those few days they submitted their gains back, hence residential mortgage declining by 3.4 percent while apartments by 4.7 percent.
The proposed measures to the problem were to buy up mortgage-backed securities on the open market. Through this it would be easier to raise prices of the securities that in turn would ease the pressure experienced by the companies that hold the securities. The reason for this is that mortgage-backed bonds are risk free; this is because of the implicit backing by the U.S government. Though these actions are good Fennie and Freddie have continued to cry about their finances and the uncertain future of the two resulted to value of securities lowering (Hudson, 2008).
U.S government made its backing explicit and the spread that had been created began to narrow down resulting in higher prices for the bonds. Due to this action many of the companies’ book value increased (Elston, 2008).
Changes in Fannie and Freddie would in turn affect many apartment-company REITs that have been depended on mortgage firms. There is fear that they may look to scale back their lending activities in multifamily housing that may make future development difficult for the companies. Also this may result to loss of renters in apartment industry since the government in most cases bolsters the single family housing market by lowering of interest rates. This would in turn reduce the ability of the landlords to raise rents and also may result to lower rents in some markets (Hudson, 2008).
In conclusion the action by the government of intervening and stopping Fennie and Freddie from operating seems to have more negative impacts than the positive ones especially to apartment industry. This is because they acted as financiers to the industry and if they are not there it means that the industry will be affected negatively. This in turn will not only affect the two companies and the apartment industry but also other sectors in the society. This is because the income obtained from the sector also plays great role in the running of the society and increases the total income in the country (Mandura, 2008).
In stead of the government taking such an initiative of throwing Fennie and Freddie from the market it should have accessed the role it plays and then look for another alternative to this. For instance the government should have initially intervened through explicit backing of the different sectors instead of throwing the key players out (Mandura, 2008).
List of references
- Hudson K, (2008), Commercial REIT Stocks stage Retreat.
- Elston E.G, (2008), Listed property stocks as a portfolio diversifier, An introduction to the Ibbotson REIT analysis.
- Mandura J. (2008), Financial markets and institutions, Cengage Learning Publishers.