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Fannie Mae & Freddie Mac Bailed Out Today! Boom Or Bust?

“The Feds took over Fannie Mae and Feddy Mac today!  Time will tell what happens next for East Bay Real Estate consumers and who will pay the bill.”,  says Jim Walberg.

The Federal Government made their historic announcement today – a Federal bailout of Fannie Mae and Freddie Mac could not wait another day!  The straw that broke the camel’s back was the liquidity condition of both of these mammoth financial entities.  It is frightening to imagine that both of these companies own or guarantee about $5 TRILLION in home loans – about half of all the nation’s total home loans!  And, we need to be reminded about my phrase, “Do not be fearful!” - False Evidence Appearing Real!   

The plan that was announced today by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, places the two companies into a “conservatorship” to be run by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing. “A failure of Fannie and Freddie would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.  And a failure would be harmful to economic growth and job creation.”  Paulson said at a news conference today in Washington.  With this bailout, the Feds have now made $200 BILLION available to them to shore up their liquidity issues.  Again, this money is coming from US as an addition to the national debt.

The roll of these two financial institutions is to buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors.  This allows that national banks like Wells Fargo Bank and Bank of America to make more loans.  The problem affecting the mortgage meltdown has hit Fannie Mae and Freddie Mac VERY hard!  The past twelve months have seen an alarming number of their loans started going into default, emptying out the companies financial reserves and sending ice through the veins of the credit markets around the world.  Costs have skyrocketed and the Feds could not wait another day by placing them into a conservatorship.   The Treasury Department is now guaranteeing the solvency of these two lenders.  That means that YOU and ME are the ones guaranteeing the loans because more money is just going to be printed to bail them out.

With this bailout mortgage rates on conventional 30 year fixed rate loans are expected to fall by the end of September.  If the mortgage interest rate falls for home loans, it should attract more Buyers into the market, which would then have a positive effect on home prices.  However, Greg McBride, a senior financial analyst at Bankrate.com did say,  “Continued investor wariness and a depreciating housing market may keep rates from dropping.  We are not looking at sunshine and daffodils in the housing market anytime soon.”

Paulson stressed that both Fannie and Freddie are still in business and will open their doors on Monday with a new management team.  Freddie CEO Richard Syron and Fannie CEO Daniel Mudd will no longer run the companies, with the FHFA taking over control of their boards.  Syron and Mudd will be replaced by two market veterans with the job of restoring the mortgage agencies to a profitable condition. Herb Allison, the former chairman and CEO of pension provider TIAA-CREF, will head Fannie Mae. Allison formerly served as president of Merrill Lynch.  David Moffett, who served as vice chairman and chief financial officer of U.S. Bancorp until early 2007 and then joined the Carlyle Group private-equity firm as a senior adviser, will take over Freddie Mac.

Federal Reserve Chairman Ben Bernanke, who led the efforts to help get the U.S. housing market and the broader economy back on track, applauded the decision by Lockhart and Paulson.  “These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets,”  Bernanke said in a statement.  The real test will come when financial markets around the world open Monday.  Pimco’s  Bill Gross, a widely followed bond fund manager, said that the Freddie-Fannie plan was the right move.  “This is a significant step and almost exactly what we had hoped for,” Gross told CNNMoney.com  Sunday.

Time is always the judge of any decision, especially one of this magnitude.   I am not a fan of ever increasing our national debt.  Today it is already staggering without the additional billions required to support this bailout.  Still, the rescue of Fannie and Freddie may go a long way towards bringing stability to the housing market while making it easier for consumers to obtain affordable mortgages.  We will see.  I look forward to your comments.