In a move aimed at reducing the uncertainty surrounding the future of battered mortgage giants Freddie Mac and Fannie Mae, the U.S. Treasury and the Federal Housing Finance Authority announced Sunday, Sunday September 7, 2008, a rescue plan that seeks to strengthen the financial position of the struggling U.S. government-sponsored enterprises, as well as ease the current crunch in the mortgage markets.
The Wells Fargo Economic desk described the bailout of Fannie Mae and Fredie Mac as follows:
”The administration created a "conservatorship" which, according to them "is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations." And this "conservatorship" will have the full backing of the U.S. Government and of U.S. taxpayers.Although the Treasury has said that the move may be a net gainer for taxpayers, the truth is that nobody knows how much it will end up costing. If this move does not work, and the credit crisis continues, the cost could start at $200 billion, which is the current authorized size of the lines of credit the U.S. Treasury has put in place to defend Fannie Mae and Freddie Mac."
Brad Soderberg, a home mortgage consultant with Wells Fargo, says the following,
"I believe that the move to intervene Fannie Mae and Freddie Mac was correct. It was needed to secure financial system stability as the two enterprises were having problems to raise capital and to refinance/roll over their debt in the market.The worst part, however, is that the U.S. Treasury and the Federal Reserve are attacking the consequences of bad policy decisions, but not the causes of them.
What has happened during the last several years is the consequence of the complete failure of the financial regulatory system. And what markets are waiting to hear from the Federal Government is how these issues are going to be solved in the future? Or how are markets going to price risks correctly rather than what has happened during the last decade?
The biggest problem today is that the current environment is not conducive to a decrease in interest rates. All the problems the mortgage market is going through today are going to mean higher mortgage interest rates in the future, especially because "affordable housing," which has been the objective of Freddie and Fannie since both company’s inception, will be limited in the future.
In fact, the bailout of Fannie and Freddie includes a provision that the firms will lower their exposure to mortgage backed securities(MBS) by 10% per year starting in 2010, which means that the market for MBS will be reduced further. This means that liquidity in the mortgage market will be reduced considerably more than what it is right now, which is not conducive, on its own, to lower interest rates.
Of course, this is not a foregone conclusion, just a possibility.”
Brad’s comments are insightful. We can speculate all day long on what might happen, what will happen, and what should have been done. But it's all just speculation.
What we can do at this point is make responsible choices in our own lives, and we can make a concerted effort to elect representatives who will do the same. We cannot change what has been done in the past.
As all things in our countries past, we will move on, survive, and eventually we will thrive again.
