Monday, September 08, 2008

Why Taking Over Freddie and Fannie is Good

On Sunday the Federal Government determined it most expedient for the financial stability of the mortgage markets to place Freddie Mac and Fannie Mae into a conservatorship, tantamount to a Chapter 11 bankruptcy, allowing the companies to continue to operate while they get their acts together.

Allowing the government sponsored enterprises to fail would have been catastrophic to financial markets. Allowing them to continue to operate with business-as-usual would have been no less damaging, and possibly a dereliction of duty. To be sure, hatchets will fall on the heads of individuals charged with the fiduciary responsibility of running these companies in a sound and prudent manner. For now, however, the conscientious thing to do is make sure the cancer of corrupted accounting does not creep any further than it already has.

It’s been said when US markets sneeze, the rest of the world catches the flu. The global mortgage markets have been coughing and wheezing since our domestic mortgage meltdown began to infect the foreign markets with a fever. Here’s why I believe the Treasury Dept. did the right thing on Sunday.


Somewhere, somehow, someone must be held accountable for the stupidity, laxity, and greediness that has brought us to an environment in which there are more mortgage loans on the skids than at any time since The Great Depression.
Yes, it’s an election year.
So what.

Neither party is blameless in turning a blind eye to the financial shenanigans that resulted in loan packaging that is so convoluted and so corroded no one can figure out what’s going on, beyond the fact that they stink. It is in the best interest of the country to lock the doors on Fannie Mae and Freddie Mac, figuratively, sweep out the trash, literally, and begin with a clearer picture of how these companies will operate, hand-in-hand with the Treasury Dept.


Because Fannie and Freddie operated with the implied support of the Government, investors assumed the GSE’s were bullet proof. As the mortgage meltdown reached a boiling point and foreign investors became skittish about the paper they were holding, fewer were willing to buy additional contracts, which had the effect of shutting down liquidity in the marketplace.

With the gloves off, the government stepping in, and no question going unanswered, confidence should return.
It won’t happen overnight.


If you’re in a stable mortgage, hold onto it.
If you’re in trouble, talk to your lender, because they don’t really want your house back. They’ve got plenty already, thankyouverymuch.

In fact, the odds are that mortgage lenders are going to be even more flexible in the future in the ways that they create workouts for troubled loans. The modus operandi will be “keep them in their homes; we don’t want another REO.”


What happens with Fannie Mae and Freddie Mac will be key to the survivability of the domestic mortgage markets, and the financial credibility of the US on the global stage.

Fannie Mae
CEO Daniel Mudd is out; so is Richard Syron, CEO of Freddie Mac.

They will be replaced by men who have faced similar challenges in the past: former TIAA-CREF Chairman Herb Allison will wield the broom at Fannie Mae, and former U.S.Bancorp CFO David Moffett will muster the assets at Freddie Mac. They’ve got their work cut out for them as they clean house, shore up morale, re-establish trust in these institutions, and eventually, wean them completely off the public teat.

Shareholders of Freddie and Fannie probably aren’t going to be too happy with their stock performance in the near term. While I am not recommending you run right out and buy any more, it would be interesting to watch the price of those shares just after the companies emerge from their reorganization. Warren Buffet was observed snapping up beaten-down shares of other troubled financial companies early in the meltdown. His behavior through all of this has been worthy of observation and emulation.

Am I happy my tax dollars are going to bail out two of the biggest dawgs in the tall grass?
However, I consider this a relatively cheap price for maintaining and repairing the integrity of the domestic mortgage markets.

I am not in the market for a home loan now, but I will be in the future, and frankly, I don’t want to kow tow to a foreign lender for my next mortgage.

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