Friday, July 18, 2008

What will happen to Fannie Mae & Freddie Mac?

Fannie Mae and Freddie Mac will not be allowed to fail.

For one thing, things aren't as bad for them as it seems and for another their failure would cost too much.

The bad loans that I've talked about previously in US Housing Market Crises caused by Mortgage Backed Securities and The Future of the Housing Market only make up a small fraction of the entire Fannie Mae and Freddie Mac holdings. It is my opinion that the lending halt earlier this year hurt them more than the defaulting loans.

Will the government bail them out? Probably.

They are in short term trouble which they can probably survive on their own but the government cannot take the chance. Too many retirement accounts are invested in hedge funds that bought Fannie Mae or Freddie Mac backed loans. With the demise of even the illusion of Social Security on the horizon, they cannot afford to allow people's retirement accounts to take that kind of hit. It would be like Enron times 10 or so.

So, what are the government's options?

I'll cover that in the next post.

Jeffrey J. Miller, Economist, MBA
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