U.S. Government Takeover of Fannie & Freddie

By Joel Persinger
YourRealEstateDude.com

As a card carrying tax payer who dreads the ever increasing involvement of government in our day to day lives, I must admit to having a feeling of foreboding as a result of Sunday’s government takeover of Fannie Mae and Freddie Mac. Uncle Sam raced in with a pot full of money (yours and mine) to prop up the ailing companies which have experienced record losses. I should also mention that the CEOs of both companies are being bounced out the door.

The U.S. Government (that means you and I) will purchase some $1 billion of preferred shares in each company in an effort to make this deal work. You and I have apparently also pledged to provide as much as an additional $200 billion to help Fannie and Freddie deal with the heavy losses they’ve already suffered as a result of defaulting mortgages. When asked how much you and I, as tax payers, will eventually have to pay for this deal everyone says, “I don’t know.”

The “plan” places both companies into a conservatorship. What does that mean? Well, it means that the management of the companies will be controlled by the Federal Housing Finance Agency, also known as the FHFA. It also means that the U.S. Congress will now have its fingers in the Fannie and Freddie cookie jar to a much greater degree than ever before. This is the same Congress that can’t agree on where to have lunch on any given day let alone how to effectively manage the tax payer’s money.

While my knee jerk reaction is to slam the whole thing as just another unwanted intrusion by the government into affairs that it neither understands nor has the capability of addressing, it appears that the financial markets are rather keen on the idea, at least for the moment.

Financial markets around the world surged this morning as a result of the news and just about every talking head on the planet is predicting lower interest rates for home buyers and greater stability in the lending market. Even the loan officers and loan manager in my office seem to be feeling rather positive about it.Who knows, it may provide some needed breathing room for the financial markets in the short term. Just the same, I will reserve judgment for a while. In my experience, markets which are allowed to heal themselves come back stronger and healthier as a result. However, when the government inserts itself and takes on the mantle of, “Lord of the Marketplace” rather than allowing a holistic healing to take place, a new and greater set of problems are not far behind.