Summary
The government takeover of ailing mortgage giants Fannie Mae and Freddie Mac was no surprise and has been jumped all over by the mainstream press. This move was intended not to cause something to happen, but to prevent something from happening. That something was the imminent bankruptcy of the two entities that account for about 80 percent of U.S. mortgage issuance. What does it mean for those who watch from afar in locales like Omaha,Denver,Orlando and Atlanta?
Analysis
Mortgage rates may adjust downward a bit, but from a big picture standpoint, it will be business as usual. That is, until the new government-owned entity starts writing down mortgage principal balances for defaulted borrowers and other unintended consequences. Home prices will continue to decline but not as sharply had Freddie and Fannie been allowed to collapse. The problem is that the government, and by extension the taxpayer, is now on the hook for whatever losses Fannie and Freddie suffer. The Treasury Department tells us that they will not suffer any losses, but their forecasting track record has been horrendous both before and throughout the mortgage crisis. Remember, that just a few weeks ago the Feds stated that such a bailout would not be necessary. The amount of exposure is unclear,but some estimates put the dollar amount at $300 billion! The U.S. government does not have that much money to cover this private sector loss. My children,grandchildren, ad infinitum will work much of their lives to cover the losses incurred by those risk takers who gambled and were declared "not responsible" by Uncle Sam. Admittedly, allowing these two GSE's to fall would have been disastrous in the short term. But that is our problem in assessing these financial firestorms---short term thinking. With time,much pain and sacrifice,the market would have prevailed and the taxpayers would have dodged a very large bullet.
