This Washington Post article leaks some details.
The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially
No surprise there.
Instead of giving each company a big capital infusion upfront, the government could make quarterly injections as the companies’ losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.
That is, it’s cheaper up front.
Paulson, Federal Reserve Chairman Ben S. Bernanke and James Lockhart, the director of the housing finance regulator, told the executives of the plan, which would strip them of their jobs but not include any broader management shake-up.
That was an historic meeting!
If the government plan succeeds, uncertainty in the markets around Fannie Mae and Freddie Mac could subside, making it easier for the companies to get access to funding at cheaper rates. That, in turn, could have a spillover effect in the overall market for mortgages, lowering interest rates and helping the battered housing market recover.
I don’t know if this strengthens the market as much as it stops the bleeding.
Well, I guess that is the first step in the healing process.
{ 2 comments… read them below or add one }
ks 09.06.08 at 12:01 am
This might be the sign to buy.
If the government owns these two entities, there will be far too many ways to act irresponsibly with tax payer money. The best part is that the executive branch would have a lot of control over the two companies with little congressional supervision. It would be possible for a single person to say “no more Fannie and Freddy foreclosures”, and those foreclosures cease.
The federal government could considerably slow the foreclosure rate. This would then, somewhat, zombify the housing market. The market would slow down, but prices would stabilize.
The only reason I think this could happen is that the government can be counted on to act in a stupid and reckless manner whenever the costs can be delayed for immediate political reward.
This might very well be the best time to buy. At least it is not the worst time to buy (that was a couple of years ago).
Brian McMorris 09.09.08 at 5:18 am
Interesting conclusions, KS. But I don’t agree that there will be a decrease in foreclosures because of this takeover. That is quite a leap. If a homeowner doesn’t pay his mortgage, a bank must foreclose at some point. Delaying foreclosure does not solve the banking crisis.
The good that comes from this event is a decrease in mortgage interest rates. That should help some people, on the margin, qualify to purchase a home. It also improves the market for MBSs (mortgage backed securities) as it removes a cloud from over that market. This will help bank liquidity and make more funds available to lenders, on the margin.
I keep emphasizing “on the margin” because we are light years removed from the financial market of 2006 when entities from around the globe were sending money to America to be loaned out for mortgages (via securitization in MBSs). Even though the dam may have been broken, that is not to say there is a torrent of money waiting to be invested on the upstream side.
Without a flood of new cash to be loaned out, and a resulting artificially high demand for houses, I find it highly unlikely that prices will rebound any time soon, and will likely keep drifting lower, albeit at a slower rate.