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

[robert tapia]

Simply put this BAILOUT is the Harvard Mafia taking care of itself...and Paulson is the Godfather of it all...here he is having the nerve to say quote:"as painful at it may be the foreclosures have to continue due to people not wanting to fulfill their obligation to pay their mortage or being in a mortgage they could not afford."...and what about Wall Street...who sold us the bill of goods...Are they not in debts that they should not have been..Did THEY NOT TAKE RISK? Why are WE THE PEOPLE allowed to fail and they are not? Why do WE THE PEOPLE have to lose it all yet OUR GOVERMENT bails out the crooks with OUR MONEY?...Simply put OUR FOREFATHERS would have people like Paulson, Bernanke, Cox and Bush strung up on a tree for their crimes of allowing our country to be in this position...