What Does a
Government Take Over of Fannie & Freddie Mean For the Average
American?
So the inevitable has finally happened. A few months back the
government authorized themselves the power to take over Fannie Mae
and Freddie Mac "should the need arise". Yesterday the government
finally pulled the trigger on their carefully planned take over of
the mortgage giants that are responsible for about $6 trillion
dollars in mortgage debt between the two of them. This debt is now
no longer held by the independent Fannie Mae & Freddie Mac. It
is now you and I, the average tax payer that is responsible for half
of the mortgage debt in the U.S.
Make no mistake; this is the largest government bailout of a
financial company in U.S. history. The Government will immediately
invest about $30M of liquidity into these companies, but in reality
most experts agree that the Government will invest at least $250
Billion into the two firms before it is over. These are companies
that reported about $14 Billion dollars in losses over the last
year.
Why would the Government do such a thing you ask?
They never had a choice!
Had the Gov. not stepped in now and engineered this indefinite
Gov. "conservatorship" the fall of these two behemoths was
inevitable. Had we seen either or both of these companies fall it
would undoubtedly have been the end for the U.S economy and likely a
catalyst for a global meltdown. This is big stakes folks. There was
no way Uncle Sam was going to let these companies fall, and hey if
you are going to bailout the biggest financial firms in the
country... why not make a little money while your at it right!
The Gov. will be given nearly 80% of preferred stock in the
companies with a guaranteed 10% annual return. All those other
investors holding stock are now in 2nd place if anything should
happen being Uncle Sam :)
What does this mean to the average Joe?
Well here is the good news. The day after the Feds shot their
bazooka at the financial meltdown, the 30 year interest rates fell
from 6.25% down to 5.5% overnight! This is in large part because
interest rates are risk based. The lower the risk the lower the
rates. Now that Uncle Sam is taking charge the market is GUARANTEED
by the Fed Gov. to not fail. No matter how much cash it takes to
stay afloat Uncle Sam is willing to foot the bill. This means far
less risk and therefore far lower rates. We are predicting that very
soon we will see par interest rates in the low 5% range!
This not only provides lower rates but also more liquidity into a
strangled credit market. The spigot just got opened a little further
and we are now drizzling mortgage financing instead of dripping it.
So in addition to lower rates and more liquidity we are predicting
that the actual cost of banks lending money will decrease which
should drive some investor interest back into the mortgage backed
securities. This "could" result in slightly less stringent
underwriting standards allowing more people to snatch up some of the
excess housing inventory that is hammering home prices.
New construction has already decreased significantly so lower
rates, more affordable loans, and more accessible financing could be
the catalyst to get us on the road to a housing recovery.
What about the future of Fannie & Freddie?
This is where the Gov. is flying blind. Their hands were forced
to step in and their "conservatorship" is open ended. This means
that the truly hard decisions will be left to whoever becomes
president of the United States in our next elections cycle and their
Congress. Senator McCain has hinted that he would like to see the
companies broken up or at the very least down sized considerably.
Senator Obama on the other hand has seemed to tend toward more
regulation but allowing them to remain more unchanged.
Yet another reason to stay on top of politics this year and delve
deeply into the policies of our two candidates!
Here is to hoping you and your family can take advantage of the
lower rates and cheaper financing... hey... you paid for it!
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