You own your house…and now mine too

Congratulations America. You just bought half the homes in America.

NEW YORK ( — Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

Which is to say forever?

Time will tell if this move will only serve to lengthen the “house cleaning” that the market would have delivered without the government’s intervention. Institutions of this size represent a pillar in our economy and financial infrastructure, and it’s hard to say whether a free market approach, a government intervention or something in between is indicated.

Treasury secretary Paulson hints that this may not be a permanent takeover.

Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,” Paulson said. “We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSE’s,” he added, a reference to the companies as government-sponsored enterprises.

How much will this cost? No one knows yet. It will have a “B” in front of it.

Paulson said the Treasury Department would provide as much money as needed to keep the companies’ capital reserves from falling below the levels that would trigger rules that automatically put them into receivership.

I guess they were right…

Critics have long argued that Fannie and Freddie were taking advantage of the widespread assumption by investors that the federal government would bail them out if they got into trouble. Administration officials as well as the Federal Reserve have argued that the two companies used those implicit guarantees to borrow money at below-market rates and lend money at above-market returns, and that they had become what amounted to gigantic hedge funds operating with only a tiny sliver of capital to protect them from unexpected surprises.

Is there an upside?

Probably. The stock market should react favorably. Mortgage rates should fall almost immediately. 

The future? With a Dem-controlled Congress…guess who’s next:

Don’t Bail Out Detroit…Bury It


8 thoughts on “You own your house…and now mine too

  1. “Is there an upside?”

    These two firms have been serving as the DNC’s private piggy bank for far too long. There was never going to be sufficient political will to pull the plug, that the current crisis gave us an excuse to close them down is a good thing.

  2. They have spent millions (I’ve heard 10’s or perhaps 100’s of millions) on lobbying. There are stories out there about the lavish lifestyle of the exec’s……private jet trips. Nice vacations, etc, paid for my the company. At first I would ask why, then, are we bailing them out. But if this is a way to end it, fine.

  3. I’ve always told people who listen to me that Bush’s REAL mistakes, the ones that have actually been detrimental to the country, is rooted in his moderate tendencies. His biggest errors have come when he leans to the left, this is a giant leap to the left.

    At some point in the last 2 years, he’s decided he’s all Keynesian now. I think he fell for the propaganda that republicans lost in 2006, because they wanted Democrat policies. So he’s giving them to us in spades, which has given us our current economic situation.

  4. The logical conclusion for companies that were created by an act of congress to start with.

    Government health care, anyone?

  5. Jeff,

    I need, I mean YOU need, a new fence before we worry about your, I mean my, basement. The dog keeps getting out of the yard & into some nearby cockle burrs & a mud hole… Not sure who Bush thinks the dog belongs to.

  6. Don’t Bail Out Detroit…Bury It

    It’s coming.

    Freddie/Fannie is an absolute disaster. They’ve artificially raised the price of housing by making loans cheap. But if they get out of the market and we go back to the standards of the past with 20% down payments and only those with good credit qualifying you’ll crash the housing market and most people’s capital with it.

    If we don’t go back, though, we’ll see the junk we’ve got now.

    I’ve got a buddy out near Philly. He sold his house in NJ and cashed out a nice capital gain and bought a new place with 0% down. He took all that cash and went on a bender with some nice vacations, new furniture, new cars, a monster boat, etc.

    Then the market crashed. He’s now 30% underwater on the loan, probably more than $200K. He’ll never make that back in this lifetime. Economically it doesn’t make sense for him to stay there. He’d be better off personally walking away from this mortgage and getting another mortgage in 7 years when the market’s settled. On the other hand, you and I and the rest of the responsible public will be stuck with paying off his mortgage.

    You need to get people to have some skin in the game. That’s something we’ve been dropping in the last decade or so due to political agendas of both parties.

  7. Well, I was thinking I’d start investing more in real estate, but this isn’t exactly how I was thinking of doing it. :^)

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