Why You Should be Worried About the Rescue of Fannie Mae and Freddie Mac

Excellent article - very intelligently analyzed and argued. This crisis will be made significantly worse and substantially longer if the government starts trying to manage it.

So, how do think this mess should be handled? If you don't have anything constructive, stick to reporting the weather.

The banks offered me sexy ARMs and interest-only loans when I purchased my home 4 years ago and I opted for the straight 30-year fixed, not wishing to gamble on long-term interest rates always being in my favor. I don't even know what my home is worth and I don't care as I owe a certain amount and when that is paid, it's paid. It's that simple. I sleep easily, no matter what interest rates do, yet, I paid higher interest rates for that privilege; and, I might add, the taxpayers who are the ATM machine of the government pay, on average, more than half their income to taxes (factoring in federal, state, gasoline, sales, ss, and property taxes). Why should I, after making good decisions which cost me money, and after losing more than half my subsequent income to taxes, have to now additionally shell out even more to protect companies and people who had no moral hazard in making money off of opposite and obviously seriously flawed decisions. Why should I again, be forced to protect the greedy? There must be something seriously wrong with the people who need a bailout when interest rates move only a point or two in a period of years. Why must I again have to bail them out, all the while still paying my fixed 30-year mortgage rate?

CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP There were an estimated 129.4 million housing units in the United States in the first quarter 2008. Approximately 110.8 million housing units were occupied: 75.1 million by owners and 35.7 million by renters. Of the 2.1 million increase in total housing units (since last year), 1.1 million were occupied and 1.0 million were vacant units. Of the 1.0 million additional vacant units from last year, only 20.5 percent were for rent or for sale. The number of total vacant housing units, 18.6 million, was higher than the estimated number in first quarter 2007. Of these vacant housing units, 13.9 million were for year-round use and 4.7 million were for seasonal use. Approximately 4.1 million of the year-round vacant units were for rent, 2.3 million were for sale only, and the remaining 7.5 million units were vacant for a variety of other reasons.

I find it interesting that "our" government (of the people by the people) can bail out all these crooks in the loan industry yet, “Frequently, measures of major import . . . glide through these chambers with nary a whisper of debate” (George B. Merry) of helping "our" people like me who is losing my home. How about bailing ME out? All I need is a mere $250K and/or a job (I have a 4-yr degree). Where's my corporate welfare "get of debt free" card? Who does a guy gotta blow around here to get some help?

I can't believe there isn't more outrage from the public on this topic. It's also insane that our legislators can write a bill without knowing the depth of the problem. How come the best that the Congressional Budget Office can come up with is a 50-50 chance (a coin toss) of Fannie and Freddie needing the bail-out, and yet Fox Business seems to have summed up the actual risk pretty nicely. Once again, stellar leadership decisions from our leaders.

I believe your missing the point altogether. We have peddled our sub prime loans through out the world and if the glass towers of US civilization were to fail, then confidence in the US Treasuries would collapse, leading to a flight to safety. None of our trading partners would want to hold US backed debt. Then what? Your righteous indignation for government and there role in preserving the status quo is a bit one sided. I have seen Washington go from a town of dedicated public servants, to what we have now, it appears to be on a path of privatization (corporatization) the role of government has always been to make sure the public interests are defended. Reagan was the beginning of the small Government revolution to mitigate legacy costs. The question is: is it right, or the right path? Well the post Regan military industrial build up cost us dearly. And so will the Bush legacy. I wonder how far 10 Trillion one dollar bills, stacked on top of each other would go. Would it go to Mars maybe further. So here we go again, the second round of fiat spending with demographics that clearly will create the perfect storm. 1. Huge Federal Debt, Huge deficits in Social Security and Medicare. So how do you recommend the public good be defended?

Add to the title "and support candidates like Ron Paul."

What does it all mean for li'l ol' me who wants to (before I needs to) refinance 148k left on a 30yr fixed at 7.375% to get a lower monthly maynt?

Dear Ms. MacDonald, Granted the federal government has become corrupted. However, the corporate masters that allow you to hack out a living with your inane diatribes are the ones doing the corrupting. I think that rather than reiterate their equally inane mantra of “government is bad” perhaps you should look for truth in the good book: “Timothy 6:10.” I hope you washed your hands after you typed this editorial.

Makes one wonder how often and how long the government can fish out cash from it's botomless "revenue" bag, and then think that it can solve every problem by throwing money at it. What will have to happen for govenment to become responsible again. Our capital may not be so invincible after all. Regards Helmut M. Oesterling

The author and many of the people writing comments have little or no understanding of just how important Freddie and Fannie are to the public. How good would it be for our country if suddenly 99% of people could not get a mortgage no matter what. That is why Freddie and Fannie are so important. Without them, the banks could not write mortgages. Did you know all the banks sell the mortgages to Freddie and Fannie ? Now you do and maybe now you understand why the government cannot allow them to fail. It would be tantamount to the government shutting down all our food stores. I think its a great thing and I think both are healthy enough to survive on their own but the government is offering this carrot so Americans can still get a mortgage to buy a house. If Fannie and Freddie said we have enough and we dont want to buy more mortgages from the banks we would have no more mortgages. REMEMBER THAT.

If Congress and the Bush Administration ran our Business for us(and they do, we call it a Republic, not a democracy), I'd go in and fire every last one of them. Then I'd take back the Constitutional Right of the Fed GOVT to coin it's own money. That's right, I'd fire the private company called THE FED. Then my business (the govt) would coin it's own money interest free. I'd let Fannie Mae and Freddy Mac fail, and then I'd tell those folks in their homes that they can either move and rent for awhile or stay in their homes rent-free until my company had sorted it all out. What a boost to the economy to free up all that mortgage slave money. Then, I would get rid of interest rates altogether. Home prices would drop, as they should. Over time, prices would stablilize at a price that was actually really and truly affordable. When that happened I would offer folks who stayed in their homes their homes back at the stabilized price, interest free. Banks would no longer want to hold the mortgage because there would be no interest incentive. So if banks would not want to own the homes, eventually only builders would own them. They would then offer a portion of the profit off the sale of a house to the bank that gives the homebuyer the loan. So banks would compete for the loan. That is true affordability. The govt needs to abolish interest rates period and coin it's own money. So many Americans, including myself, saw this coming. But the media made fun of our message or ignored it, on the only outlet for getting the word out-the internet blogs. The media is owned by the folks who also are shareholders in THE FED. Fire these guys, already.

The problem is that the old lefty-righty arguments about the degree of government involvement in business, fail to take into account the emerging realities of the 21st century. History shows time and time again that pure laissez-faire attitudes of the government certainly permits the fox to be loose in the proverbial hen-house. Yet, with the ease of movement of capital that modern technnology allows, the government itself can do little to enforce control (at least, less than it could do before). It is the duty of government to "promote the general welfare" of the people. That primarily means to me policies that protect and grow the country's middle class. This is the group that has been continually squeezed out by the problems in housing, financing, energy and commodity pricing, and inflation in "basic" food, clothing, health, and education costs, until their remaining disposable income (which historically drove growth in the economy) becomes nil. If government action for Freddie and Fanny (& even Bear Stearns) protects and softens the blow to the general populace, then they did the right thing. I would even like them to go further, and see some action taken against the criminals in the corporate and financial sector. Invoke the RICO act that was used so successfully wielded against organized crime, generations ago. The old "mafia" had nothing compared to the corporate criminals of today.

Elizabeth Macdonald today you have just become my financial hero. I have been out of the market for the last eight months or so, and have recently considered investing my whole retirement savings in the two big F's. Thank you for your heads-up analysis and now, I will continue to watch from the sidelines. Will

I am gravely disappointed at Elizabeth MacDonald's article, "Why you should be worried...". It is one more example of one-sided reporting and fails to even attempt a higher view than the skeptical, critical one. I worked at Freddie Mac as a Vice President of Investor Relations. Our division was downsized and my position was eliminated. I still own several hundred shares of both Freddie Mac and Fannie Mae and have worked closely with Freddie Mac executives for nearly two decades. These two firms were created by acts of Congress and were intended, ultimately, to benefit Americans by developing a secondary mortgage market to encouraging home ownership. They are private companies, serving a public purpose. They accomplish their mission by purchasing qualifying loans made by banks and mortgage companies. The world could operate fine without them -- they simply provide a marginally lower interest rate (i.e. compare the conforming vs. jumbo mortgage rates in your Sunday paper). About 1/2 of all Americans with mortgages have obtained their financing indirectly through FNMA or FHLMC. Freddie Mac has issued recent statements about its current level of capitalization: see http://www.freddiemac.com/news/archives/corporate/2008/20080711_statement.html. There are criminal penalties now awaiting managements who withhold material information from investors. We must accept these internal assessments as credible. Investors should not confuse the condition of the national housing market with the condition of Freddie Mac. Admittedly the two are highly interrelated, but Freddie Mac's book of business is performing very well, reflecting its traditionally conservative underwriting standards. This conservative underwriting stance cost both Freddie Mac and Fannie Mae substantial market share as sub-prime loans boomed through the private label conduits from 2003 to 2007. To see this distinction for yourself, see http://www.freddiemac.com/investors/volsum/pdf/0508mvs.pdf [shown in Table 6]. Compare Freddie Mac's delinquency rate with that of Countrywide, Washington Mutual, Wells Fargo, Wachovia, Lehman Brothers, Bear Stearns, US Bank, Bank of America and the other major lenders who have retained mortgage credit risk as do Freddie Mac and Fannie Mae. Freddie Mac didn't sanction sub-prime lending - it never has. One might be critical of the GSE's conservative stance, given that they are ostensibly to be 'out front' in funding America's housing needs and not holding back by funding only the safest of loans. The genius of the GSEs rests in the hybrid nature of the firms which combines the capital allocation discipline of free enterprise with a defined public purpose. Thus, the GSE foray into the mortgage credit spectrum is ultimately governed by risk-adjusted returns, and the GSEs bowed out of sub-prime lending, not only because they are ill-conceived loans, but also because the numbers simply never penciled out. As a rule, the GSEs are out front and have been, but the sub-prime mortgage was a key point of departure, where the GSE's chose to break from the industry. Only when the go-go mortgages of this decade were sliced and diced into credit-protected AAA rated securities did the GSEs find any value and participate in measured portfolio investment. GSE profits and executive compensation levels are not excessive - like all companies, they have had good years and bad years. The genius is that the government has outsourced this affordable housing finance to competitive free enterprise in a manner that is well regulated and that works. I am pleased with Secretary Paulsen's insistence that the oversight and public support of these organizations will be increased. They won't use a cent of taxpayer money - they don't need it, never have, and never will. Paulsen is visibly standing behind these organizations so international investors know we aren't abandoning them. It is the housing market - not Fannie and Freddie, that is in trouble. If allowed to, these institutions can be a material part of the solution. If your view is authentically patriotic, then stand behind your own criticism and ask that your next home mortgage not be funded by Fannie Mae or Freddie Mac. Thank you for the opportunity to contribute to the discussion.

from a previous comment: Comment by Ken Kesler Jul 24th, 2008 at 11:49 am Your article is right on point. My question is “Who will bail the taxpayers out? Welcome to the United Socialists of America. Ken Kesler HA HA indeed and even worse - what if Abu Dhabi says "We don't even WANT the US real estate anymore" jk on that one But it is true, when you buy a home today, you will pay mortgage AND you will also be paying at tax time to keep your FM^2 bailed out. That's like depositing in a bank on one hand, and paying bank robbers to go rob the bank with the interest you earned on the desposit.

There are very bad things on the horizon for the average person in this country. In the next 3 years there will be no middle class it will only be the very rich and the very poor. I feel that they should let fanne may and freddie mac go down. I feel that the 18 and 12 million in pay checks should be paid back.

An old saying goes that if you put 1000 chimps in a room with 1000 typewriters, eventually one will write Hamlet. The internet as a whole, and this discussion in particular, put the lie to that old saying. Conspiracy theories, fears of a coming depression, class warfare!!! Freddie and Fannie will survive without a bailout, unless the chicken littles in the media carry the day. This article does nothing to add to the discussion. Leave this sort of "huffing and puffing" to CNNs Lou Dobbs and those jerks over at MSNBC.

I have been investing in gold(heavy) and Euros(lightly) for over 4 years now. Paying off my taxes(about $3000) this year then I am out of here. National debt skyrocketing and people want to stay to pay the large taxes in the history of the world? No way.

We can bail out all the big wigs so that they don't lose any money, but the poor SOB that loses his retirement because of the falling stock market or very low interest on Bank CD's is SOL.