The U.S. Recovers Fannie and Freddie’s Fumble

Ah, Sundays.  A day that many people sleep in, read the paper over a cup of coffee, and hang out around the house all day.  Especially this Sunday, with the long-awaited start of the NFL season. (FYI: Football Sundays are a great time to visit Home Depot.)

But Sunday was anything but relaxing for Treasury Secretary Henry Paulsen. Instead of watching his favorite team, he was announcing to the world that the U.S. government was taking over mortgage giants Fannie Mae and Freddie Mac. From the L.A. Times story:

At a news conference in Washington, [Paulson] laid out a plan to place the companies into conservatorship, under which the government will direct their operations from now on. The plan also calls for the Treasury to make capital injections into the companies, up to $100 billion each over time, and to lend them money as needed.

The move was made on Sunday so financial markets would have a chance to digest the news, with the hope of heading off panic when business resumes on Monday. The government did the same thing when it bailed out Bear Stearns, which, incidentally, was announced during another American sports obsession, March Madness. Coincidence?

Plummeting home prices and soaring mortgage defaults have ravaged the finances of Fannie Mae and Freddie Mac, which were created by the government decades ago to support the housing and mortgage markets by buying home loans from banks and thrifts.

Although they were chartered by the government, the companies are owned by investors, making for a strange hybrid that critics have long warned was fraught with peril.

Unfettered for years as they sought to boost earnings for their shareholders, the companies ballooned in size. Between them, Fannie Mae and Freddie Mac now own or guarantee $5.4 trillion of U.S. home mortgages, or about half the total outstanding.

By the way, it’s possible this takeover won’t prevent the economic meltdown everyone is fearing, says The Washington Post:

There is no guarantee that it will work, and it comes at a potentially massive cost to taxpayers. The government has pledged to inject money in the companies in any quarter in which they would otherwise be insolvent — up to $100 billion in total for each company.

“This is a shareholder bailout financed by the U.S. taxpayers,” said Armando Falcon Jr., formerly the chief regulator of Fannie Mae and Freddie Mac.

One analyst noted that the government’s intervention to date hasn’t achieved the desired effect.

“All of the things over the past year that the Fed and the Treasury have undertaken have been intended to stabilize the mortgage and the housing markets,” said Howard Shapiro, an analyst at Fox-Pitt Kelton. “What’s happened over time is that a lot of things they’ve done really aren’t working.”

“If this doesn’t work, there aren’t too many more arrows in the quiver,” he said.

Yikes.  For those buying and selling homes, don’t expect credit to loosen up anytime soon, says CNN/Money.

Borrowers, however, shouldn’t expect the ever-tightening lending standards to ease. With defaults and delinquencies multiplying and home prices falling, Fannie and Freddie will likely keep a close eye on underwriting practices. Lenders are demanding credit scores above 700 these days, up from 620 in the past, and downpayments of 20%, up from zero in some cases, experts said.

The bigger picture, though, is whether this takeover will achieve its desired effect and calm the financial markets.  Whether you or I can buy a house today isn’t quite as important as saving the financial system from collapse.

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