The takeover ...

I think we should aim our anger deeper than the short term use of taxpayer money to shore up the GSEs. From everything I've read, most people agree that like it or not backing them is necessary, that they really are too big to fail. Just the fact that this administration is doing it should be enough proof of that; putting government in charge of anything involved with markets is totally against their nature. So I'm inclined to think that this move, while unpleasant, is far better than the alternative. (I leave open the possibility that I'm just a rube being led astray.)

Anger should be directed at everyone who helped create the circumstances that made this possible: lenders, mortgage and RE brokers, borrowers, and especially policy makers, all of whom "conspired" through a million individual acts of greed and foolishness to create the bubble.

As for the housing market, lower mortgage rates should help. It seems like people would see a significant dip in rates as an opportunity that they should grasp before it goes away again. That would mean more applications and more purchases, which would move us closer to clearing inventory and putting a bottom under prices.

But, as I've finally come to believe after much hang-wringing, it's about fundamentals like months of inventory, price/rent, and price/income. Even with a small surge in buying, none of these are where they need to be, nationally. So while a rate dip might help a bit, the fact is the downward pressure on prices is going to continue until we reach a place where the funamentals line up. Actually, it will probably overshoot and housing will be a bargain basement sale for awhile.

Excellent. Now taxpayer dollars can be used to allow more people to buy overpriced properties that they cannot afford.

Makes sense to me. Let the privatization of profits and socialization of risk continue.

I can't wait until the government steps in to bail out the credit card companies. Then I'll be able to rack up some debt and stop paying my credit card bills. I think I deserve a new flat screen TV courtesy of the US taxpayer.

This latest bailout is like giving a patient with a broken leg some painkillers, Sure it provides temporary relief, but it does nothing to solve the under lying problem.

The problem was too much credit, which caused home prices to become too expensive. The solution is not another bail out in attempts to keep home prices artificially high. The solution is a contraction in credit and lower home prices.

Thank God that the two heads of Fannie and Freddie will receive eight figure compensation packages. With millions of people facing the prospect of losing their home, and the taxpayer bailout of the two entities, I'd hate to see those two have to take a pay cut on their way out.

For the time being, my opinion is to monetize the bad debt of these companies. The goal of the USG and the Fed right now should be to increase the size of the US dollar pool and fight a deflationary depression. Taxes arent going to be the big problem if the US enters a depression.

I saw this bailout comming a long time ago. Sure, Bill Gross and many others are going to cash in, but who cares. The needs of the many outweigh the needs of the few. And right now, inflating the money supply in a credit-soaked society is far more important than worrying about taxes.

With interenational markets up 3% or more, clearly the rest of the world feels the same way.

I'm upset that the government manages to screw up everything it touches. Since the end of WWII the government has gotten it into it's head that owning a home is the end-all and a goal we must strive to achieve. We must be losers for renting, a home is what you want. Because of this we have suburban sprawl to deal with. We have home owners getting tax breaks, while renters, who are trying to save to buy a home, get no housing tax break.

But this wasn't enough. We need not 1 but two huge underwriters to continue to "promote homeownership". Why? Why is the government trying to promote home ownership? In this day and age, wouldn't the free market sustain itself? Get rid of the MACs, get rid of mortgage deductions, and let the government be more of a watchdog than a participant.

"The government: just when you though the problem was bad, wait until you see how much we bungle the solution!"

This plan requires Fannie and Freddie to reduce their mortgage holdings by 10% a year until they reach $250 billion. That my friends is called credit contraction or deflation.

Your children, and their children, and their children, and their children, and their children will hate you. They'll hate this generation of Americans who rang up trillions of dollars in debt in their name without their consent in a self-centered unethical and immoral orgy of greed, consumption and fraud.

Shouldn't the US taxpayer, now that we own Fannie and Freddie, set about suing the mortgage lenders and investment firms who sold Fannie and Freddie the garbage loans?

British friends of mine in their 60s asked me recently when are Americans going to revolt? I said never. We are too fat, lazy and entertained to do it. And indoctrinated that we shouldn't do that because then we wouldn't be "free individuals".
But, why should some liars walk away with millions and we responsible people have to cover them? Not right. How much will we put up with? Quite a bit it seems.

Freddie and Fannie should have been allowed to fail. They were traded companies, and as such should have been exposed to the same risks as any other public corporation. But the deed is done and now 50% of the mortgages in the US are now under the control of the US government.

So here’s my thoughts. If any good could be gleaned from this, its that if the US government is now going to control 50% of the mortgages, then perhaps it is in their best interests to engineer a lending system that more closely ties affordability to actual incomes. This will likely come in the form of stricter loan requirements such as providing loans to buyers with incomes that support the price. If such a system were setup with Freddie and Fannie, this could over time remove much of the speculative, purely investment nature of housing. That’s just my guess. Both of these companies were grossly mis-managed over the years. Perhaps the US will clean house.

As bad as the collapse of Fannie and Freddie would be, bailing them out, will, in the end be much worse. Instead of going through a painful recession now, we will surely go through a devastating depression in the not too distant future.

Like a drug addict who prolongs his recovery by taking another hit because it causes less pain, so goes the IOUSA.

I think I've made my last mortgage payment, how about you? I think I'll skip paying taxes too. What the heck, everybody's doing it. Thanks for the free house America!

If housing prices come down another 20% in the areas I'm interested in and I'm still employed, or if I hit the lottery, we'll buy because we'll be in the tried-and true range for salary/housing expense metrics with a prudent financial cushion, as called for in the iffy future of the economy. Since the economy is much more iffy, and recession/depression is now a contingency that must be hedged against, and jobs are more tenuous, I'll need prices to drop a little more than I had targeted a year ago. Doesn't change a thing, but I am a bit more bitter and resentful at the enablers and pushers of irresponsible financial behavior. If my taxes go up, I'll shut down our spending even further - I'll have to to continue saving for a home purchase in real terms.

Hmm. The equity markets seemed to have liked this very much, not so much the bond boys. The spread between treasuries and GSE bonds didn't decrease very much, meaning the hopes of lower mortgage rates may not pan out. In other words, Paulson seems to have shot off his bazooka with little to show for it as far as mortgage rates go.

This is a contradictory mess. The agencies are now supposed to be more careful about their capitalization and portfolio quality while at the same time making the markets more liquid. OK, good luck with that. Also, as others have pointed out, the agencies running off their portfolios after 2010 probably means decreased mortgage availability in the future--making homes today a really, really bad long-term investment.

At least the Chinese are happy. They openly ordered the US taxpayer to make good the GSE's obligations to the Peoples' Bank of China, if you saw the news reports. So my quarterly tax payment this year may go straight to Beijing. Ah, capitalism!

No one wants to face facts. Home prices must return to sustainable levels. Paulson doesn't want to recognize that, the GSEs don't, and the Globe certainly doesn't, as witnessed by the laughable article on bidding wars that appeared yesterday.

Everyone thought Fannie and Freddie were fine in March, (well, ok not everyone, I and others here clearly didn't) and the real estate market still went down.

So now Fannie and Freddie were rescued, and we are back in March. With nothing else changed. The situation hasn't actually improved, just gotten back to its previous level of disaster.

And the conservation plan specifically mandates that Fannie and Freddie will have to own fewer mortgages in the future. THis means credit tightening, which all other things being equal means a lower rate of return on housing in the future.

In the short term, there should be a drop in Mortgage rates as Fannie and Freddie's debt spread narrows down to govt. levels. But the fundamentals which may require the Fed to raise rates are still there. And if treasury has to borrow a lot to fund the bailout, that's going to drive up rates as well, ironically.

What I'm wondering is why no one is holding Barney Franks' feet to the fire for his actions? He seems to have gotten a free pass, and his statements that his plan did nothing to undermine Frannie and Freddie are looking a little dubious.

It'll be interesting to see what happens to the new conforming loan limits on that front. Any change in those will be hard on eastern Masss.

Marcus, I think you're overlooking the most likely long term possibility: the GSE's mortgage portfolios will continue to grow through 2010 and beyond.

Why do I think their portfolios will not be decreased starting in 2010 as Paulson promised? Well, the reason he created that clause (in my opinion) is because the congressional funding mandate ends at the end of 2009. However, when the end of 2009 rolls around and housing is still struggling, I'm willing to bet Congress will extend the mandate.

Realistically, the three goals that Treasury has set (mortgage availability, market stability, and minimizing taxpayer loss) are mutually exclusive. As long as the first two goals are not solidified, the third goal will be constantly rolled back. In other words, taxpayer funding will continue open-ended until the credit and housing crises are resolved.

the constitution hasn't been rewritten here. a temporary conservatorship has been created under a lame duck administration. whether the actions were necessary and a drastic divergence from a laissez faire policy on government intervention or an ideological play by the administration to try to exact policy change long after they are out of office remains to be seen. the mandates to shrink will be followed for what about 4 months and then there will be the battle of all battles to see who controls the latest incantation of our beloved secondary wholesalers. let me take a wild shot in the dark here and suggest that haliburton has created a subsidiary that packages mortgage securities to investors that while no preferential treatment is alleged has unexpectedtly won a closed door bid if the privitization of said hybrids should happen to take place in the next 4 months.

probably pure ignorance here on my part but under the plan the actual tax payer bailout will be the guarantee of all defaulted mortgages during the conservatorship? the estimates i've seen are in the $100bil range which is equivalent to the cost of a year's worth of our boys strutting around in their desert camo's waiting for the next roadside bomb to blow their leg off. the national debt is expanding exponentially and the federal government subsidizes every industry from milk to transportation. literally layers of people made careers off the profits gained in the last half decade, lawmakers and regulators underestimated the effects of the run up and all anybody can do is point fingers at borrowers for getting caught up in the frenzy. seems hypocritical to me. i'm obviously no economist but my thoughts were that mortgage rates weren't following the t bills b/c of inflation worries not b/c of transactional costs in the secondary markets. we'll see.

bikes2work, that's very cynical. Of course, you're probably right.

Thing is, even a functioning fannie and Freddie didn't, and aren't going to, bail out the housing market. Not unless the Fed turns on the spigot like it did in 2002, which seems a tad unlikely under current conditions.

Making loans only to people who can actually afford them is really going to put the brakes on things. Going back to 3x income for qualification is a really dramatic thing, that I think people are underplaying.

Charles, I don't really mean it in a cynical way but perhaps it is.

Just based on the path of events so far, it seems that the credit and housing crises will continue to stumble along for some time. And it's hard to imagine congress going along with a shrinking of the GSE's size if housing is still tanking. Put those two possibilities together, and voila, more congressional intervention is in our future.

I agree with you that the GSE's won't bail out housing...house prices will continue their current slow decline. But on the other hand I don't see a interest rates spiking to 8% or 9% either...the government just won't allow it and the resulting meltdown we'd see.

Paulson's Quick Draw

Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.

The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bills when they default.

In contrast to Paulson’s continuous misreading of the market, I have consistently predicted the failure of Freddie and Fannie. I did so in my book Crash Proof, and in numerous speeches, commentaries and television appearances. I also was quick to point out that Paulson’s Bazooka would not remain holstered for long.

There is absolutely no substance to Paulson’s insistence that based on the government’s first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can’t afford. In fact, the plan insures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.

Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won’t work. The government “solution” will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.

In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.

Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can not do? In effect the Federal government now has absolute power to corrupt absolutely.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

Let's be serious, the takeover of Fannie and Freddi was to appease the foreign central banks that hold trillions of dollars of our debt. We need the foreign central banks to continue to buy our bonds and finance are debt ridden country.