Freddie Mac and Fannie Mae Bailout

Freddie and Fannie Bailout September 7 will now be remembered as the day the U.S. government took over the mortgage market. What that means for financial markets going forward has never been less certain. This is no longer the worst mortgage crisis since the Great Depression; this could be the worst mortgage crisis, period. It’s also the end of an era. The U.S. Treasury on Sunday announced a takeover of both Fannie Mae a move that has nearly no precedent in U.S. history. Together, the companies own or guarantee roughly $5.3 trillion* in home loans, roughly half of all outstanding U.S. mortgages. The bailout will involve as much as $200 billion in capital and credit lines to both GSEs, according to documents released Sunday afternoon by the Treasury. This is following a report by the Mortgage Bankers Association last week that more than 4 million American homes- 9% of all homes with a mortgage (i.e. 9 homes out of 100) - were either behind on their payments or in foreclosure at the end of June. A combination of $3.1 billion dollars was lost by Fannie and Freddie Mac between April and June. It is predicted that half of those credit losses are from loans with ballooning or adjustable monthly payments. It is also predicted that a government bailout could cost taxpayers between $25 billion and $200 billion dollars according to the Congressional Budget Office which would make it one of the most sweeping government interventions in the workings of financial markets in U.S. history. Putting that in perspective, it is estimated that the airline bailout after 9/11 cost tax payers $15 billion dollars. So what is $1 billion dollars? If the US Treasury spent $1 million dollars every single day, it would take 2.8 years to spend $1 billion. So if this bailout takes $100 billion dollars (just to estimate in the middle of the predictions), then we (the tax payers) will be paying $100 million dollars every single day for the next 2.8 years to cover the bailout. It almost takes your breath away doesn’t it? What does this mean to your buyers and sellers? Time will tell. Right now we are seeing bonds soaring (i.e., rates will come down), but stocks are trying to rebound so it will be interesting to see how the week plays out. My prediction is that we will see even more tightening in the guidelines as Fannie, Freddie and investors will want to make certain that they don’t continue the cycle. Yesterday was very interesting for me. I was interviewed by Channel 4, 5, 11, 33, WBAP and Sirrus 147 on this bailout. Had a lot of fun (my neighbors were teasing me as we had news stations in the house all afternoon), but obviously it was a big subject. If we can get any clips, we will send them out to you. In the mean time….. stay tune… it should be a bumpy ride this week!