Fannie-Freddie bailout "doesn't change anything" for housing market

Will the bailout* of Fannie and Freddie help the housing market? It probably won't hurt; it could lead to slightly lower mortgage rates; it provides a new buyer for mortgage-backed securities (your government). It saves thousands of jobs at Fannie and Freddie. It prevents a financial disaster that would have done even more damage to the moribund mortgage market. But does all that add up to real help for the housing market? Not according to the smart folks at Calculated Risk: 

For housing, this doesn't change anything. Housing fundamentals remain the same: excess supply (especially distressed supply), tighter lending standards, and prices are still too high compared to incomes and rents. The possible slightly lower mortgage rates are almost inconsequential compared to supply and price issues.  And the economy is still in recession that will linger for some time.

Bill Gross, the bond market kingpin from Pimco, disagrees; he tells Tom Petruno he believes the bailout will prevent some future losses in home prices:

... Gross has revised his estimate of how much more of a decline is in store for home prices. He had been expecting average home prices nationwide to fall an additional 10% to 15%. With Fannie and Freddie preserved, he sees prices bottoming after a further decline of 5% to 10%. But that isn’t his forecast for California, where market conditions are much worse and likely to stay that way, he said.

The larger question, it seems to me, is whether the government's rescue brings some stability back to the entire financial industry, or just buys the government time before the next unprecedented, historic bailout of the next institution deemed "too big to fail."  Banks are sitting on piles of bad debt and are unable to raise money and increasingly unwilling to lend; does the Fannie-Freddie bailout change that?

*Is it really a bailout? Tom Petruno poses this question on his blog tonight and concludes that, while shareholders aren't getting bailed out -- they could lose everything -- debt holders are in fact being protected, and thus bailed out.

My take: Of course it's a bailout: the government is saving two faltering enterprises; it is keeping them alive, with federal promises and federal money. Whether you think that is correct or not, it is unusual. The government allows countless businesses to fail every day. Sometimes the government even destroys businesses (remember Arthur Andersen?).  In this case, it is pledging vast sums to save two businesses. It is changing the rules to protect them from suffering the full consequences of their actions. It is bailing them out.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Comments

[SMRR]

Actually. It does change it. It is a confirmation of the collapse of the lending system. It is lending that allows people to pay more than cash. Fannie and Freddie are broke. That means the US T will only be backing up the creditors (foriegn) who own the debt. The US T does not have the money to back it up, they will get that from you and me in our tax contributions which will rise.

So, until Fannie and Freddie are in the black - they have no money to loan. No money to loan to buyers means that people can only pay cash. Now, I don't have a million. But I can put together 200K. I'm not median income, I'm somewhere like 5% top nationally and 10 or 20% in LA. So the top 20% of homes in LA, are now worth 200K. Because mortgages have now become a thing of the past.

Does someone have Ed McMahon's email? Cause I'm totally willing to take 5,000+ square feet in Beverly Hills for 200K. So long as the plumbing is in good shape and Ed hasn't been hocking the copper pipes.

[SMRR]

By the way. NY Times has Krugman, Kristol, Friedman. It just galls me that LA can't do better than Petruno, his Jim Jubak year late, tame statements and that Ted Dansen circa 1980 Cheers photo of his. Can't you get Thornburg a column?

[aj]

In my humble opinion, what a huge mistake. Just simply have ordered a full audit, disclose the results and then decide. It is obvious that it is much worse.
Tomorrow is a "dead cat bounce"! Futures are up.
But wait a few days or weeks and it will fall back down.
Just my opinion.

[formerlahomeowner]

Not a bailout? What else can it be? Federal management/conservatorship, cash infusion, explicit guarantee of debt by US Treasury. If only my business can have the same terms from the US govt.

I do think that this will change the real estate market in the short term since banks will be more willing to lend. In the long-term, fundamentals will rule and people cannot simply afford these houses. Prices must decline or incomes must increase. Which is more likely to happen?

[Eddie]

>>>>Because mortgages have now become a thing of the past.

You are such a fool.

[Cal]

I dont think it changes anything for the market except Mortgage spreads should drop. But fundamentally everything else is the same. Fanny/Freddie will still buy mortgages as they always have the damage to the market if they stopped or slowed signficantly would be too great. So in the scenario where fannie/Freddie stopped buying, that has improved. But the scenario where the current status quo is maintained and borrowers have to afford the house they are trying to buy.. nothing has changed locally.

[Jacinto]

Shall we keep in mind this “bailout” relates to the financial industry, which can’t operate without a fuzzy feeling of trust on the part of savers-investors-lenders. And failure can have huge unanticipated consequences that don’t happen with other industries. This is not a manufacturing company or a CPA firm that can fail with minor damage to the public.

Shall we also remember the government “bailout” of Chrysler in the 1980s which was profitable to the government. I’m less familiar with the depression but I hear the same was true with a mortgage agency called HOLC which was a predecessor to Fannie-Freddie and was dissolved at a profit to the government.

So instead of foaming at the mouth over “bailout” of “rich corporations” or some other nonsense, maybe we can think of this as an economic smoothing device. Government does that sometimes. That is why they’re there, i.e. to smooth the excesses of capitalism. They often do a sloppy job but surely they’re the solution of last resort in this case.

I’d say the anger should be directed at the people who let this situation happen, not the people trying to fix it. Some of the fault sits with prior management at Fannie-Freddie but not most of it.

[Rational Renter]

Doesn't change anything. Banks are not going to be any more likely to lend tomorrow than they were last week. There's no money in mortgages for them anymore; it's too risky a sector. No creative financing to prop up prices - you know what that means.

[jb]

How come they feel that sacking the top ceo's is sufficient?

Over 20 people make in excess of 1 million per year and countless others make huge salaries. Decades of huge personal gain and then we hold the bag when their fraudulent house of cards falls? The execs should be hauled out in the streets and killed, and Paulson drawn and quartered.

[1929]

The start of another GREAT Depression my friends... We just got done paying $800B for the so called rescue bill, $30B for Bearsterns, and now another $500B to bail out our foreign investors??? They knew the risk when they bought our worthless MBS's. Where is my bailout when I lose money in the stock market, or even better, VEGAS... Simple econ, when inflation rises, T must rise, along w/ that mortgage rates, thus making houses more unfordable, and they ultimately lose more value as people pay more for interest instead of principle. So in the end we all become a lot more poorer. I hope all of the politicians and high paid execs at least thank us and our grandchildren for their bailouts.

[cc]

So this is how American capitalism works? Profits are private gain, losses are public pain.

[It All Happens on the Margin]

So this is how American capitalism works? Profits are private gain, losses are public pain.

Posted by: cc | September 08, 2008 at 03:45 AM

cc, yes and no. FNMA and FMAC were private enterprises but they did pay a huge portion of taxes.

I am certainly very uncomfortable with this action; however, the alternative is also a disconcerting thought. Do you have another suggestion on how to handle this, O Canada?

[Jack Rogers]

These days it's gotten difficult to ascertain whether there is a bottom forming or the bubble still has more to deflate. A lot of potential buyers are hesitant to pull the trigger on a home purchase because they don't want to buy an asset that loses value.

According to the real estate industry it is always a good time to buy. How can it always be a good time to buy? It can't. Clearly 2006 was a terrible time to buy. If we've learned anything in the past two years, it's to be careful and view with skeptism advise offered from real estate people with a self-serving agenda.

Below is a link to a home valuation forecasting tool based on time tested fundamentals that seems to make sense. The idea is to Sell the Ceiling and buy the Floor. The Ceiling is the top level of prices where the income to home price ratio exceeds the historical norm for the area. So when prices reach or exceed the Ceiling, you'd be financially wise to sell and definately not buy.

The Floor is the price level where buying makes sense due to the yield the rental income of the house could generate. If you buy the Floor there is limited downside risk to further price declines. You can check it out here www.UsHousingMeltdown.org/home-value.asp

[Tombstone Realty]

Seems like nonsense to me. The stock markets are thrilled, because they think this means that somehow the US Government is going to make it better.

Thing is - this will do nothing to lower current rates on active housing loans, just new ones. The prices are too high even with this possible 1% reduction, lending standards are just as tight as last week, people are still losing jobs, inflation is rising.....

All this did was protect major investors - not even small banks are being protected. This is just one giant rip off.

I'm not buying a house. Forget it. Why should I bust my bottom keeping these corrupt companies afloat.

Nonparticipation - it's the only weapon we have.

[unomas]

From the WSJ:

Potentially, Mr. Syron (Freddie) could walk away with an exit package totaling as much as $15 million, said David Schmidt, a senior consultant at James F. Reda & Associates LLC, a compensation consulting concern in New York. That includes a pension and deferred compensation, about $3.7 million in severance pay and a possible payment of $8.8 million to compensate for forfeiting recent equity grants. A Freddie spokesman said Mr. Syron had said he doesn't "anticipate receiving nearly that much."

Mr. Mudd's exit package (Fannie), including stock he already owns, could total $14 million, Mr. Schmidt estimates. That includes $5 million in pension and deferred compensation, $4.2 million in severance pay and $3.4 million of restricted stock, based on Friday's closing price. The value of that stock could fall sharply, however.

Sweet.

[Shaun Dakin]

I worked at Fannie Mae for 4 years. There are a lot of good people there. However, the CEO's of both FNM and FRE do not deserve ONE RED CENT more than the already enormous $14 Million each received in the past year.

Join our face book group and demand "not one red cent more!"

http://tinyurl.com/5owexm

Shaun Dakin

[1929]

"Do you have another suggestion on how to handle this, O Canada?"

I have a recommendation on how this could have been handled... How about let these two fraud companies go under. All of the MBS holders knew the risk of these securities, especially Bill Gross of PIMCO who was buying MBS's when they were at all time lows, because guess why??? He knew there was a bailout coming!

Both of these company CEO flat out lied about their capital positions, LIED!!! Paulson LIED about the Bazooka that he wanted to keep in his pocket just to have just in case...

The recommendation is to let these companies go under, let Ginnie Mae handle mortgages, and let the chinese, pimpco take the fall for the risk they took, instead of the taxpaer paying for all this madness....

[alvin]

"The government allows countless businesses to fail every day. Sometimes the government even destroys businesses (remember Arthur Andersen?). In this case, it is pledging vast sums to save two businesses. It is changing the rules to protect them from suffering the full consequences of their actions. It is bailing them out."

it's not really changing the rules peter. the difference is the "implicit" guarantee of the debt sponsered by these entities - which our government let grow unchecked to the point where an "explicit" guarantee became necessary. and for all the heat greenspan is taking in regards to the current financial meltdown, no one can argue that he hasn't been warning us about this potential outcome for years.

[Hebe]

Just let them fail. What happened to "Free Market?" If life sucks after they fail oh well. Learn and move on. This is BS big time. I love the talk of free market until things collapse. Who needs regulations, WE DO. Fricken Republicans want free market and no regulations until something like this happens. Priviatized profits and socialized losses. What a bunch of Crapola.

[Susan]

"Fascism should more properly be called corporatism because it is the merger of state and corporate power." Mussolini--

Ahhh, welcome to Fascism. Thanks Henry Paulson. Just what we need---a former Goldman Sachs CEO dictating to government what needs to be done to protect the corporate elite.

This is a horrific event for the American taxpayer. People should be flooding the streets of the capital with guns!

[susan]

Alvin--interesting that you said that Greenspan has been warning us for years that this was coming down the road. Interesting because he is the one that helped to create this mess we are in now. GREENSPAN SHOULD BE IN A ORANGE JUMPSUIT ALONG WITH THE ENRON CEO'S!

[susan]

Yes, I am sure that Paulson, Bush and the other crooks are putting together a nice severance package for the failed CEO's of Freddie and Fannie (of course paid for by the taxpayer). Lets have some fun and think of a $ figure for each CEO. Lets see, maybe $20 million for being the biggest screw up! Carly Fiorina (former HP CEO who was a complete failure) was fired and then given at least $14 million to leave. At least the taxpayer didn't have to pay for that.
What an outrage!

[sheila]

i just mentioned this in one of the other threads, but it is becoming more and more clear that it is not Fannie and Freddie that are being bailed out, it is the foreign investors WHO PAY FOR OUR WARS who are being bailed out, which is why we "cannot" let the markets work.

they will cut off our deficit spending to cheney's cronies, who have only made several hundred billion dollars so far, and we can't have that! ladies and gentlemen, open your wallets and look away, it's gonna be ugly.

[alvin]

susan,
i agree greenspan definitely deserves much of the criticism he is taking for his role in the current financial crisis (although i wouldn't go so far as putting him in a jumpsuit - he didn't break any laws!), but he WAS the most senior official i can recall sounding the alarm years ago that FNM and FRE were growing out of control - and of the significant risks they were posing to our economy.

[tew]

CR and Gross can both be right. Gross is saying that the Fannie/Freddie action will bring down mortgage rates short term and thus dampen nominal price declines. CR is talking about fundamentals, saying that incomes and rents are still far out of line. CR is clear that the adjustment can come from a combination of falling nominal prices and time (the agent for inflation and nominal income growth).