Well, it happened. In case you haven’t heard the news, Fannie and Freddie were bailed out by the Federal Government over the weekend. I’m not going to go over all of the details but just try to hit some “high points.”
So, here goes:
1. The Federal government now owns 80% of Fannie and Freddie. That means that the shareholders in those two companies lost 80% of their equity in the company compared to what they had last Friday.
2. Why did the Government do this? It’s pretty simple. The markets had lost confidence in the long term viability of the two institutions and therefore the debt that they have issued was being questioned and their ability to finance additional housing was being called in question. This was done to stabilize and calm the financial sector of the markets which were very volatile to say the least.
3. What has changed since Friday? A couple of things: 1) The “unofficial” backing of Fannie and Freddie’s debt by the US Government is now official. 2) The question of what will happen to shareholders in the company has pretty much been answered.
4. What hasn’t changed since Friday? The problems in the loan portfolios at Fannie and Freddie haven’t gone away. The problems in the housing market haven’t gone away. However, today the markets so far have been breathing a huge sigh of relief that says, “Yeah, Uncle Sam is here to protect us!”
So what does this mean going forward?
1. I’ve already heard that a lot of economist are saying that there could be a significant drop in mortgage rates. I’m not so convinced that we’re going to see THAT BIG of a drop for a couple of reasons: a) The US Government just became on the hook for an additional $5 Trillion in debt and that will have an impact on the cost of treasury debt and so forth. b) The additional borrowings by the government are going to have an impact on the value of the dollar and that will make US debt more expensive. c) The only thing that has really changed is that the “right to foreclose” on Fannie and Freddie has actually happened. It hasn’t changed that much. But we’ll see. I hope I’m wrong. Our rates dropped by .25% today.
2. Volatility in the financial markets will be the “norm” this week. Expect big fluctuations as the markets attempt to sort out what this all means and what happens from here.
3. The government did this to prevent the mortgage markets from seizing up. That was a necessary step because having a mortgage market that keeps lending money is crucial to eventually working through the housing debacle that we are in. However, there are substantial issues in the mortgage world that aren’t being solved by the takeover.
4. No substantial changes in programs or underwriting guidelines. The goal of the bailout was to keep Fannie and Freddie functioning and that will happen, but it’s not going to make credit a lot easier or downpayment guidelines lower. Let’s face it, Fannie and Freddie weren’t making any money doing things the way they used to, so I don’t think we’ll see a return to that.
5. As the markets realize that the fundamental issues in today’s housing/economic/credit market crunch haven’t gone away, we’ll see the euphoria of the first day or two slip and the value of the bailout will diminish. However, it will continue to keep the housing market moving so we can attempt to work through the inventory issues and eventually find a bottom and start building from there.
Is this the silver bullet that is going to answer all of the housing market and economy’s problems? Sorry, I wish it was, but I don’t see it that way. It was basically the implementation of what the markets felt was coming any way.
Until next time….
Bob in San Diego says:
Some thoughts and observations on Fannie & Freddie posted yesterday by CR at calculatedRisk where he called the morning rally, Treasury sell off and downtick in mortgage rates.
I think Paulson is right on when he said, “Our economy and our markets will not recover until the bulk of this housing correction is behind us.”
The $64 billion question is how long will that take?
September 8, 2008 — 9:28 am
Todd says:
“..Is this the silver bullet that is going to answer all of the housing market and economy’s problems?”
No, it just pushes the problem off onto the next administration, relieving the current one of any responsibility in the history books.
September 8, 2008 — 9:57 am
Bob in San Diego says:
@Todd – this mess can’t be laid at the feet of any one administration.
September 8, 2008 — 11:17 am
Ryan Ward says:
The idea of the federal government creating socialized housing scares the $%^& out of me. They have promised to slowly send Fannie and Freddie back to the private or at least semiu-private sector. When have they ever done that? I don’t like the long term problems that this may cause.
September 8, 2008 — 1:28 pm
Ted Mackel says:
Tom,
Great post I linked your post on my blog. Terrific overview. My clients and prospects will benefit!
September 8, 2008 — 5:21 pm
Tom Vanderwell says:
Ted,
Thank you!
Tom
September 8, 2008 — 7:18 pm