What will the government do about Fannie Mae and Freddie Mac?

In What will happen to Fannie Mae & Freddie Mac? I

One is to take over Fannie Mae and Freddie Mac. I'm sure there is a worse choice but none come to mind at the moment. What we don't need is another works program for bureaucrats. Worse, it would be subject to even more political influence that it is now.

They could gift money to Fannie Mae and Freddie Mac to bail them out. This is a possible solution but where will the government get the money? By borrowing it or printing it. In a time when the dollar is already depressed, this isn't a good idea. It will cause import prices, including oil to rise even further.

They could extend credit to Fannie Mae and Freddy Mac (as has been proposed). This would allow Fannie Mae and Freddie Mac to borrow at rock bottom prices to cover their near term shortfalls. The problem is that this might decrease the credit rating of the US government and increase the cost of our national debt.

As I said earlier, letting Fannie Mae and Freddy Mac fail would be terrible. However, it would not be a national crises level of terrible. Most of the worst loans were bought by foreign investors and foreign governments. The heaviest conversion of retirement accounts took place when the loan products were merely questionable rather than the border line fraudulent loans of 2004. I doubt if the government will but they could just say: "thank you for the cash infusion, did you even look at what you were investing?" Still, I don't think that'll happen. We rely too much on foreign investment dollars to burn investors world wide.

I think that the government will extend credit. While that will put the US credit rating at risk, it will only have a negative impact if the situation worsens. The only way for the situation to get worse is for investor confidence to stay bad or get worse. I think that the lending reforms that have already taken place in Fannie Mae and Freddie Mac have gone a long way toward solving the situation that led to the lack of investor confidence. Having the full weight of the US government to back them up should bring investors around. If that happens, the government's credit rating will not be negatively impacted. If anything it will get better as we emerge from this "crises."

Jeffrey J. Miller, Economist, MBA
Investment Musings
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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
Investment Musings
Real Estate Seminar List

Home sales improve? Decline? Both are right

I found this great article in the Detroit Free Press. An excerpt follows:

Realtors say numbers up, counties disagree

BY GRETA GUEST • FREE PRESS BUSINESS WRITER • July 13, 2008

Realtors have been reporting recently that metro Detroit home sales have moved into positive territory, yet county government tallies indicate mostly that sales are down compared with last year.

While somewhat confusing, both sets of data are accurate. They measure different sales within different time frames and, for both buyers and sellers, they are important gauges of market activity.

The rest of this article

Jeff Miller, Economist, MBA
Real Estate Seminar List
Investment Musings