US Treasury takes over Fannie and Freddie: What does this mean?

Mortgage and Lending with Pacific Funding

This weekend we witnessed the biggest Govt expansion into the private sector ever.  I'm a free enterprise guy and personally, I don't like Govt involvement in the private sector.  Fannie and Freddie where designed as a publicly chartered agencies designed to operate in the private sector, and when things are going well you can make this work, but during down times you cant.  They have an internal conflict of interest because they're trying to serve the general public and also be profitable for investors and shareholders.   It's like having a non-profit company with shareholders.  You can't have it both ways.  Earlier this year the US Treasury bailed out Bear Stearns and now Fannie/Freddie.   Who's next GM or Ford?  My favorite French word is Laissez-faire, and we need to re-introduce this term to Washington.   

Having said that, I think the govt had to do this and they had no other choice but risk the entire US economy.  The catalyst for this surprise move was PIMCO's announcement that they won't buy anymore mortgage backed securities, (PIMCO is the largest buyer of mortgage securities from Fannie) followed by foreign investors also saying that they are pulling back.  Those statements left unattended would have ignited a wild fire in our economy that would have gone out of control.  Fannie and Freddie hold too much of our economy within 1 company.   A failure of either will crush the markets.  You may as well put a big for sale sign on the White house lawn. 

Can you say S&L Crisis?  This is almost a complete repeat.  Our Govt was criticized at the time for getting involved, but in hind sight it proved to be the right thing to do and the cost of the S&L bail out was recuperated through the R.T.C. in the years that followed.  By comparison, the Japanese didn't do anything to fix their banking industry and they continued into a 10 year recession.  

The Govt actions this weekend established a preferred bond of $200 billion to keep the 2 firms from becoming insolvent and thus renewing investor confidence.  The liquidity and investor confidence will keep money flowing and it will bring down interest rates (in the short term).  It won't fix the mortgage crisis, but it will make it cheaper to borrow money.  The cost to tax payers is yet to be determined, but taking a preferred bond position helps to ensure that the US will get its money paid back over time. 

The long term picture is very uncertain and the new administration will have to tackle this issue next year.  Secretary Paulson is pushing for down sizing of Fannie and Freddie to be no more than $250B in guaranteed mortgage securities. 

Time will tell.

What's you're take on this?

Comments (3)

Marcel Martinez

I agree with your comments but I think the key will be in wether or not "this is the last time"... Remember when we were kids and our moms would say, "esta es la ultima!!" whenever we would misbehave? Same concept...

Has the market bottomed? If you subscribe to the notion that the economic woes are largely due to the housing mess and credit crunch, it's hard to not be encouraged by the end of the Fannie-Freddie deathwatch. At the same time, I think investors at Lehman are feeling pretty good right now... it doesn't really matter that they lost $4 BILLION last quarter because it would be unlikely that the government would let them crash and burn. Their stock went up on Monday and justifiably so... what's the risk??  It's not going any lower!! I hope this is "la ultima"... but I seriously doubt it. I hope this is "the bottom" but I don't think so. I do think we are closer to the end than the beginning but there's a little ways to go.

By the way, did you see who the principal holders of those preferred bonds are...?? The Chinese Government!!

Sep 10, 2008 03:33 AM
Martin Rodriguez
Pacific Funding - Valencia, CA
Senior Loan Consultant

Marcel thanks for the comments.  I hope its the last time, but I doubt it.  Yes I was aware that the Chinese were the principal bond holders, hence my comments about putting a for sale sign on the White House lawn.  I just stopped myself short of saying that the buyers would speak mandarin. 

No I, don't think we've reached the bottom, but we have begun to build a foundation or a net that will serve as a floor and allow stability to return to the RE marketplace.  The new administration will have to address the future role of Fannie and Freddie and hopefully create new avenues to bringing continued liquidity to real estate. 

Sep 10, 2008 04:27 AM
Marcel Martinez

I was wrong about Lehman Bros and I am glad!!  The government did let them crash and burn and I think AIG is next. B of A bailed out Merrill so I think the Feds are sending the message that the free ride is over. The market took a hit but it's not the end of the world. Why they bailed out Bear Sterns and not Lehman Bros I don't know but I am glad to see that it looks like they are sending the message that tax payers are done bailing out Wall St. Let the market make it's way down to 10,000 or 9,700 and the dollar/euro to about 1.30 or so and then start buying!!!

Sep 15, 2008 01:27 PM