At the risk of adding one more voice to the fray, it is impossible not to comment on the nationalization of Fannie Mae and Freddie Mac which, by default is the socialization of the home mortgage business.
We have now stepped firmly into a socialized housing policy… taxpayers are directly responsible for the engine that drives the housing industry.
This was not unexpected. For a history and detailed explanation and the forecasting of this very result, see my blog articles from back in July; The Credit Crisis and the Rush to Government Bailout and Fannie Mae and Freddie Mac; the Federalization of the Mortgage Business
The second of these two entities, Freddie Mac, was created to address the issue of “competition” when Fannie Mae was spun from the government’s balance sheet to make the Federal budget look better at the time. Fannie Mae would have become the dominant power in the mortgage market overnight; so Freddie Mac was created to compete with them.
It’s now time to combine the two under our new nationalized mortgage industry.
Answering Two Questions
There is a great deal of analysis circling around two primary questions about the impacts of this government take-over:
What affect will it have on mortgage interest rates? Does it signal the “bottom” for falling house prices?
The Effect on Mortgage Interest Rates
If mortgage rates go down as a result of this action it will be temporary, and a short-lived bounce of exuberance. (If you can imagine being exuberant that the tax payers have just taken on Trillons in new liabilities).
The reason interest rates won’t decline significantly, is that these two entities have been borrowing and funding their business as if they were already backed by the government. That has been the investors view since they were formed. There is no change from that respect.
The only change today is that the “implicit” guarantee is now made “explicit”.
The only reason mortgage interest rates or the guarantee fees from these entities would be reduced is if taxpayers not only capitalize these entities for the immediate need, but SUBSIDIZE these entities further to absorb more risk than they currently have. This is most certainly a possibility, however if Government sticks to its purported plan, the idea is to be sure they survive by assuming the current risk, not creating and subsidizing new and greater risk. Yeah right.
Since these entities now come under the direct control of our politicians and the administration you can bet this tool will be manipulated to produce desired political outcomes at even greater costs to the taxpayer.
All things being equal, this particular action should be a zero sum game for interest rates.
Will this change mean we’ve hit the Bottom for Housing Prices?
In short… no way.
Housing is going to continue to be pummeled through 2009. At the risk of sounding bleak (just the facts as I see them) housing is going to continue to languish and even continue its downward spiral due to the following:
Mortgage and mortgage servicing companies continue to see rising delinquencies. Rising delinquencies create more foreclosures; more foreclosures create more REO (Real Estate Owned “by the Bank”). These companies are not in the business of making money on properties, want them sold as soon as possible and will keep selling them at below market (read downward pricing) prices. Fewer and fewer borrowers can qualify for a mortgage loan. The fewer qualified buyers there are, the lower home prices have to go to help them meet the new definition of a “qualified buyer”. Servicer’s efforts to stem delinquency and foreclosure through loan modifications and short selling have only extended the problems into an unknown future. The credit and housing crisis is crushing the broader economy. We are in a recession, credit standards have tightened considerably, job losses will continue to increase, and other asset classes (auto, credit card) will, and have, begun a rapid credit deterioration, adding to the pain.
The only way that the nationalization of these two entities would have an impact on housing prices would be if they loosen credit standards so more people could qualify for a mortgage loan. The only way they could loosen standards would be through additional taxpayer subsidies to accept higher credit risk… a very distinct possibility.
The bottom line is that unless we’re taxed even more to pay for looser credit standards and lower house prices, the only meaning this has is that our private system for mortgage financing has failed and we own it.
It is going to cost an absolute fortune to fix these entities problems and the unintended consequences of these actions are still completely hidden from view.
Instead of congress working to untangle this ball of yarn of connections between the private capital markets and the national banking system, we have just done the complete opposite.
We have just mortgaged our children and our grandchildren’s future.
This is not an “academic conversation” about moving away from free market capitalism and the constitutional differentiation between the purpose of limited government and what is supposed to be left to private interest.
This is another long and dangerous leap towards socialism. This is not some radical view, it is a fact.
Wayne LaPierre, the CEO of the NRA couldn’t have said it better recently in an interview with Newsmax…
“What motivates me is the concern that the America that is being designed right now won’t resemble the America we’ve been defending”.
A “do nothing Congress” at this point would be a blessing because every time they “do something” our principles, our Constitution and everything we purport to hold dear as a nation, is surrendered.
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