Are We Just a Dog Chasing Its Own Tail?

Maybe you've seen the news: as of today the
Federal Government is in charge of Fannie Mae and Freddie Mac.

What prompted the Feds to step in? Fannie and Freddie, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

Is this a good thing? Depends on your perspective... Many are claiming that the move was necessary in order to bring stability to the market-place. Others are saying that what is happening in our housing and lending markets is a necessary "correction" and should be left to come to its own, natural conclusion.

What do these perspectives have in common? Though analysts may disagree whether this is a necessary move or just another political game in an election year, they do agree that whether the Feds stepped in, or by allowing this "correction" to ride, is of little consequence to the endless Americans who have lost their homes due to lax underwriting guidelines and plunging home values.

What is the hope of the new Federal Housing Finance Agency (FHFA) - the new Governmental body now in charge of Fannie and Freddie?

• That it will significantly lower the borrowing costs for the agencies, thus improving interest rates immediately. In fact, upon coming into the office Monday morning, Mortgage Brokers everywhere were pleasantly surprised to see rates did, in fact, take a nose dive.
  
  
• Agency Mortgage Backed Securities (MBS) will resume trading in sympathy with Treasuries. It is hoped that the margins between T-bills and Agency MBS will narrow now that the government is in full control, thus improving rates even further.
  
  
• It is, also, hoped that this move will give the Feds a new tool to kick start a slowing economy, or put the breaks on an economy moving too swiftly with threatening inflation. If the Feds view rates as too low, they will sell Agency MBS. If rates are too high, they will be active buyers of these securities.

Think of it as a dog chasing its tail. If it runs too fast, it will spiral out of control, get dizzy and end up on the floor. If it moves at a glacial pace, it won't ever get the chance to have that victorious feeling of having caught the prize (in this case, its tail).

It's an elementary example, but I think you get the point.

How much will this cost? Analysts were split on how much the takeover could eventually cost taxpayers - although all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.

Is there an end is sight? If the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie should rise in value and the government should be able to sell off the companies and recoup its investments.

Is this permanent? Will Fannie and Freddie ever be able to run on their own again? No. It would be up to Congress and the next president to figure out the two companies' ultimate structure and the conflicting goals they operated under, but suffice to say, Fannie and Freddie, as we once knew them, are gone.

One thing is for sure, don't expect underwriting guidelines to ease anytime in the foreseeable future.

Stay tuned for more...