Is the Bottom in Sight?

The weekend news seems to take it as a given that Fannie Mae and Freddie Mac will be put into conservatorship by the US government this weekend, likely leaving anyone still holding their stock left with little more than pennies on the dollar. The political ramifications of this move may play out months to come but for the banking industry this might be the turning point to what has turned out to be a completely locked credit market.

The problem has been that while the Federal Reserve cut interest rates by 3 full percentage points over the last year, the average home mortgage has moved down only a 1/10th of a point from 6.46% on a 30 year fixed one year ago to 6.36 this week. It’s no wonder Henry Paulson is frustrated. The lack of movement in the commercial market provides a strong case that any further interest rate reductions will have little effect on home mortgages.

For most of this year, banks and investors have been unsure whether Fannie Mae and Freddie Mac would be able to continue their market maker positions in the housing industry by purchasing FHA approved loans from banks and reselling them on the open market. While the actions of Paulsen will likely be expensive for the federal budget, the costs to the economy of letting these two entities continue to stagnate, and by proxy the entire US housing market could be far worse.

One note of caution – while we may be at the bottom of the credit crisis, there is no telling whether the US economy (sucker punched by both the credit markets and 30% inflation in energy costs) will stumble into a more traditional supply side recession.  As such, I’m waiting to see a stabilization of the unemployment rate. Once that happens we will likely be in a position to slowly but surely dig ourselves out of this nasty cycle.