Fannie Mae and Freddie Mac are the two largest mortgage companies in America with their roots stemming back to the Great Depression when FDR formed them as part of his New Deal to handle the majority of America’s mortgages and mortgage repackaging. Ever since, these two government-sponsored institutions have monopolized the mortgage market. This means easy money when people are buying homes.
And it means a colossal public failure when the economy spirals out of control.
In January, the combined companies were valued at approximately $60 billion. Yesterday, they stood at $10 billion. Today, little is left except some pocket change.
A government bailout is more humble and face-saving than a bankruptcy. It also implies that the government sees the business as too vital to fail. However, these events will force some $5 trillion in guaranteed mortgage securities held banks and funds (China’s central bank alone holds $340 billion in mortgage-backed securities) around the world to be the responsibility of the government. This “conservatorship” agreement could force taxpayers to support any losses related to collapsed mortgages from Freddie and Fannie.
As foreclosure numbers continue to climb (55 percent year-over-year for July), positive reports about the housing industry have been minimal.
What is often lost in the major media articles covering these events is the positive effects of the housing bubble. Before the March 2007 crack in the economic armor, we had had six strong years of growth and double-digit market returns fueled by consumers using borrowed money to buy homes and everything that went inside them. That is the nature of a bubble: inflated results followed by a thunderous pop. I say this to all the reporters and doomsday announcers not reading this blog: You weren’t complaining when things were nice due to stolen time and flowing coffers, when a little investigating would’ve easily shown what was helping push us up Bubble Mountain.
My personal take earlier in the year, when we were six months into the unraveling of the mortgage market, was that the government and Federal Reserve would use their powers to reduce pressure well before we got to this point. I thought that perhaps the takeover of Bear Sterns would be the bottom of the financial mess, with some small straggling lenders dying here and there. The government, as it seemed, would guarantee no further extreme damage, even if it had to do so through semi-socialistic means.
Recently I’ve been optimistic about the American economy. In fact, I still am. But whether it was due to a lack of research, access to information, or an uneducated media, I did not see the banks suffering this significant a punishment at the hands of homeowners who borrowed too much and paid back too little.
It’s a shame, though, that once Fannie and Freddie were clearly cut, the government didn’t let them bleed to death. Losing is part of the deal of capitalism. Due to their size and importance in supporting the economy, these two particular companies couldn’t cave in without someone stepping in. Hopefully the executive team is at least held accountable and not granted a taxpayer parachute. What’s a bigger shame is that home buyers and banks alike allowed everyone to be dragged into this mess.
Tags: bailout, fannie mae, freddie mac
Kickass article. So, at what point can we expect a stabilization of the mortgage market (and the economy in general)?
And somehow this is all gonna get blamed on “predatory lenders” for giving loans to people to buy homes they couldn’t afford. It’s not the banks’ fault that people are irresponsible dumbasses who don’t pay attention to how much something costs before buying it. Plus, I almost guarantee that if the banks started tightening loan control, everyone would start whining about how difficult it is to buy a home.
More points to my support of elite rule…
At this point I’m not even going to try and guess when the housing market will bottom. I would hope that this is a sign of the bottom. Most professional investors have already closed out short positions on the banks and are now waiting for the dust to settle. Frankly, this is probably the worst possible news we could hear related to housing, so I think this is the last big announcement. We will probably see more foreclosures and such, but this is also another major step toward saving the market.
The economy in general will recover before housing prices and the banks due. Lower gas prices (which I should blog about soon) and a booming tech industry will help consumers and add jobs for certain people. In general, we’ve become a more tech economy anyway.
Well, I pretty much agree with Alec here. This is the fault of idiot home buyers. Not that that’s a real problem, but still… I just don’t like buying out other people’s mistakes. It leaves a bitter taste in my mouth (and, were I older, my wallet). Still, all things considered, things are better than they could’ve been. No bank runs, the only hint of recession is slowER growth, and Americans are continuing to spend almost as normal.
Thom is pretty correct, and the only areas of weakness have already been addressed (slowing housing, financial institutions that are either collapsing because their is nothing for people to “run” on them or they’re being saved, gas prices which have topped out for now).
Granted, these were all three very large chunks of the economy.
Honestly I think the problem really arose when we started handing out adjustable rate mortgages. 10 years ago they were all the fad, everyone bought into them… then they all suddenly had a 10% interest rate on a 300,000 house and are paying 4000 month… more then someone with a decent interest rate on a 500,000 house would be paying.