Consumers still face the prospect of rising mortgage rates, inflation and tighter credit despite the federal government's move to rescue Fannie Mae and Freddie Mac and avert a meltdown in the lending industry, economists and banking experts say.
Most agree that the situation would be much uglier if the Bush administration had not stepped in over the weekend to shore up financial confidence on Wall Street for the two largest mortgage finance companies in the U.S.
More than half the nation's mortgage lending activity is backed by Fannie Mae and Freddie Mac, and disaster for them could have meant soaring mortgage rates and plummeting access to credit for consumers. Consumer spending represents two-thirds of the economy - much of it borrowed.
However, financial experts point out the investments and loans for Fannie and Freddie merely preserve the status quo and do nothing to reverse the underlying problems that are fueling recession concerns and causing consumer confidence to fall precipitously.
Financial markets remain in turmoil, with financial stocks taking another beating yesterday amid worries of more bank failures.
It all adds up to uncertainty for U.S. companies, making them wary of hiring or doing major deals. Unemployment has ticked up in recent months, and many economists say the country is headed for a recession, if it isn't in one already.
"If the Federal Reserve and the Treasury had turned a cold shoulder toward Fannie Mae and Freddie Mac, we would have had a disaster on our hands," said Greg McBride, a senior financial analyst for Bankrate.com. "Now that we've avoided the catastrophe, we'll have to catch our breath and focus on the same things we've been dealing with for the last year."
Markets fell again yesterday as investors grew increasingly worried that the government's moves to support Fannie and Freddie won't be enough to stabilize financial markets. Shares of Freddie Mac fell 64 cents, or 8.3 percent, to close at $7.11; Fannie Mae shares lost 52 cents, or 5.1 percent, to close at $9.73.
Shares of both companies - which started the year above $30 - plunged by double-digit percentages last week as concerns about their finances grew.
Financial shares saw their biggest drop in eight years yesterday as investors grew concerned about the solvency of several regional banks. The Dow Jones industrial average lost 45 points to close at 11,055.19, and the S&P slid 11.19 points to end trading at 1,228.3.
