Freddie Mac Fannie Mae Bailout - It Always Rains on Sunday
Mondays are big market problems after
ending the last week on a
corrosive note. Why? Market crashes start in Asia and move quickly to
Europe on Sunday nights. By the time America awakes, the damage has
already happened, so US authorities and government regulators push out
an edict by Sunday evening before Hong Kong opens to calm their markets.
Black Monday, 1987 set the trend. On Sunday, March 16, the Fed orchestrated the Bear Stearns "bailout". Today July 13, the New York Times signals the government's willingness to essentially bailout Freddie Mac and Fannie Mae, the two main companies that buy, hold and repackage loans from lenders for syndication sales to institutional investors. Together, they hold and guarantee over $5 trillion in mortgage debt, comprising about half the nation's mortgage debt. The government (starting with Bush administrations' hapless announcement on Friday that there isn't a rescue plan) has tried to distance itself from any implicit guarantee of their massive debt load, based on the moral hazard of implying a bailout of reckless investors.
On March 16, the Fed claimed that the bankruptcy of Bear Stearns would topple other financial institutions like dominoes as investors pull a bank run. Today, the government admits to a rescue plan involving the Treasury, the Fed, Congress and the White House, in order to innure Monday's market from a complete fallout.
Add Freddie Mac/Fannie Mae to the continuing list of crushing economic blows that just won't quit. It dwarfs Friday's IndyMac collapse, which many consider a harbinger to a wave of bank failures.
Black Monday, 1987 set the trend. On Sunday, March 16, the Fed orchestrated the Bear Stearns "bailout". Today July 13, the New York Times signals the government's willingness to essentially bailout Freddie Mac and Fannie Mae, the two main companies that buy, hold and repackage loans from lenders for syndication sales to institutional investors. Together, they hold and guarantee over $5 trillion in mortgage debt, comprising about half the nation's mortgage debt. The government (starting with Bush administrations' hapless announcement on Friday that there isn't a rescue plan) has tried to distance itself from any implicit guarantee of their massive debt load, based on the moral hazard of implying a bailout of reckless investors.
On March 16, the Fed claimed that the bankruptcy of Bear Stearns would topple other financial institutions like dominoes as investors pull a bank run. Today, the government admits to a rescue plan involving the Treasury, the Fed, Congress and the White House, in order to innure Monday's market from a complete fallout.
Add Freddie Mac/Fannie Mae to the continuing list of crushing economic blows that just won't quit. It dwarfs Friday's IndyMac collapse, which many consider a harbinger to a wave of bank failures.
This is the opinion of Robert Sheridan, CEO of Robert Sheridan & Partners, a Chicago real estate & development company. Their site is www.sheridanpartners.com/market.php
Not All Financial Woes Are Created Equal
The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.
The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.
In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.
If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.
We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.
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