Today the US government seized two of our nation’s largest financial institutions. Treasury Secretary Henry Paulson annouced yesterday his plans to take control of Fannie Mae and Freddie Mac and replace the companies cheif executives. The Treasury will acquire $1 billion of preferred shares in each company, providing no immediate cash and pledging as much as $200 billion to the companies to help cope with heavy losses on mortgage defaults. The plan will put the two companies under a conservatorship with management control to their regulator, the Federal Housing Finance Agency, or FHFA.
With this bold move, the country’s mortgage crisis moves into previously uncharted waters, which could potentially saddle taxpyers with the losses from home loans made by the private sector. The Bush administration argues that the cost of this policy is far less than the toll of doing nothing to help the economy and falling home prices and defaults in the $11 trillion US mortgage market.
I wrote about the subprime mortgage meltdown in my August 29th post, “Insights Into the Subprime Meltdown”. Secretary Paulson noted that more than $5 trillion of debt and mortgage-backed securities issued by Fannie and Freddie is owned by central banks and other investors world-wide. “Failure of either of them woulld cause great turmoil in our financial markets here at home and around the globe.”
In taking this action, the government has seized control of the bulk of the secondary market for home mortgages, and with it, even greater responsibility for solving the “housing crisis”. It also marks the failure of the public-private experiment created to prop up the real estate market; investors have long believed the government would bail the companies out in a crisis.
It is believed that the move is also likely to have a positive effect of lowering interest rates for consumers.
Locally, KOLD New 13, reports in an interview with Tony Poe, a loan officer for Long Mortgage, that the Tucson real estate market has already been improving, and it has. There were about 10,000 properties listed for sale at the beginning of this year, and now the number is down to 8,000. Poe considered 5,500 to be the goal; he expects the Tucson real estate market to reach that sometime next year.
I have mixed feelings about all of this. On the one hand, if Freddie and Fannie were to fail, it would have global implications. The seizure, according to an article in the Wall Street Journal, is likely to leave a trail of billions of dollars in losses for stockholders. On the other hand, is this something that government should get into—-bailing out businesses and consumers as a reward for poor money management?
To end on a positive note, I do believe that all of this has had the result of forcing needed changes in the way mortgage lenders do business. Buyers must now prove that they can afford a home. Lenders are going back to the basics by actually checking employment, income, assets and credit scores of consumers. These practices will hopefully result in the future strength and stability of our local Tucson and national housing market.
Denise
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