The historic seizure of mortgage giants Fannie Mae and Freddie Mac will have far outreaching ramifications. With both executive boards on their way out (with incredible settlements I may add) the government is stepping in. So what does all this mean to you? 

Stability (or Stop the Bleeding!) – Fannie Mae and Freddie Mac back more than half of all U.S. Mortgage Debt. During the recent months the product line has been particularly volatile (creating a large gap between these bonds and a 10-year Treasury Bond). Any stability in this arena will quiet investors (in a good way!). 

Rate Drop – Since both entities will now effectively be government-owned you should see as much as a 1 percent drop in rates. Think of it as “direct to the manufacturer” pricing. This will be essential for banks to get back in the game. 

Weather the Storm – Nothing will fix the current situation overnight but it does help ensure the companies will not run short of cash anytime soon.  Large companies such as Pacific Investment Management Company (world’s largest bond fund) were not looking to buy unless the government took action. 

Not being one for government intervention to begin with…

I have to say this is a good move for most of us in the long run. Essentially we have cut out the middleman in order to stop the current turmoil. 

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The Bush administration informed the executives of Fannie Mae and Freddie Mac (mortgage entities) the government is preparing to seize the two companies. 

The two companies play a vital role in the mortgage lending industry and affect tens of millions of homebuyers. It will now be in the hands of the government as the executives and their boards will be replaced. 

If indeed they go into receivership the remaining stock shares will be worth very little. Any loses on mortgages they own or guarantee will be paid by taxpayers. 

With no sign losses will stop anytime soon; basically the government is trying to avoid a situation where Fannie Mae and Freddie Mac reach a tipping point (similar to Bear Stearns). 

With a lot riding on these two companies hopefully it can be corrected in time. 

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Last year, profits of $1.97 billion. 

This year (so far) a net loss of  $2.3 billion. 

So, how bad is it going to get? 

As mortgage guarantors, Fannie Mae and Freddie Mac pay out when individuals default on their loans – and there has been a lot of that happening lately. 

Last month the federal government approved the financial bailout should Fannie Mae need it. They will need it and the taxpayers will be hit hard. 

Although Fannie Mae is now taking steps to correct the situation it is really too late. Here are two steps they are taking to try and right the ship… 

• Fannie Mae lowered their dividend payout by 85% 

• Fannie Mae will stop purchasing ‘Alt-A” loans (loans where people did not have to prove their income) 

Neither will help Fannie Mae currently and in any case, it will most likely cost the taxpayers $10 – 60 billion in what is already a tough economy. 

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When will we learn from our mistakes? Or perhaps better said, “how will we ever learn?” 

The government, like an over-bearing parent, is going to swoop in and attempt to fix the current housing crisis as opposed to allowing the natural set of consequences to play out. This isn’t Monopoly, this is real money, and this “rescue legislation” is definitely a case where they are going to do considerably more damage than good. 

I don’t even know where to start. Let’s see… 

Provide Fannie Mae and Freddie Mac an unlimited credit line to make housing loans.  – Yea, and why not provide teenagers an unlimited credit card to use at the mall? 

Provide bail out to an estimated 400,000 homeowners in trouble.  - Don’t get me wrong, I feel very sorry for people losing their homes. Many were just hit with bad timing and 400,000 is not even a drop in the bucket of people in trouble. But many simply purchased too much house. When you can’t afford to make the (normal) amortized payments perhaps you should have been looking for a smaller house from the start. 

Modernize the FHA and allow riskier loans. – You are kidding right? You did say “riskier?” Yea, that will solve it all.

The rest of the items included in the “rescue legislation” are similar but small in nature. Provide tax breaks for low-income housing, provide grants for communities to purchase foreclosed properties – none of which have enough dollars associated with them to last more than 5 seconds on the radar. 

What has happened across the country is no doubt tragic, but it could (and should) have been avoided. Largely caused by greed, it only gets worse when no one learns their lesson – a lesson by no means limited to homebuyers. 

Lenders need to learn you cannot create loans that jeopardize the borrower (or the economy for that matter). The lenders would have learned that lesson by the increased amount of loans failing (kind of hard to learn if you have a big bailout). 

It is going to be tough for a lot of us but we need to let the natural order of economics take care of itself. We will emerge, at the end, stronger and wiser. The government needs to stay out of this one! What are your thoughts? 

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