Doubts Raised on Big Backers of Mortgages

New York Times

As home prices continue their free fall and banks shy away from lending, Washington officials have increasingly relied on two giant mortgage companies — Fannie Mae and Freddie Mac — to keep the housing market afloat. But with mortgage defaults and foreclosures rising, Bush administration officials, regulators and lawmakers are nervously asking whether these two companies, would-be saviors of the housing market, will soon need saving themselves.

I posted this in political, because Fannie and Freddie are GSEs (Government Sponsored Enterprises).


There is implicit but not explicit (IE guaranteed) government backing to Fannie and Freddie (unlike Sallie Mae which is explicitly backed by the .gov). I've come across three scenarios for what could happen to this massive pile of liabillities.

1. Congress attempts to bailout FNM and FRE immediately causing the debt/deficit to soar by TRILLIONS overnight. Thus causing further damage to the dollar, increasing the cost for the government to borrow money, and possibly even costing the US it's AAA credit rating. Leading to higher taxes, and all sorts of other nasty occurences. From CNN MONEY

a large rescue of Fannie Mae and Freddie Mac and result in a downgrade of U.S. debt, says rating agency.

2. Congress for some strange reason has a flash of good sense and realizes there is no way in hell they can afford to bail these two GSEs out and lets the market do it's work. Still nasty but not as bad as a bailout IMHO.

3. Most interesting and most apropo to ATS is this one. The only pool of assetts large enough to recapitalize the Banks are the Fannie and Freddie assetts(backed by the real property of the US housing market.) They've got to figure out a way to get the assetts for pennies on the dollar while taking on none of the liabilities for it to work though. Think Bear Sterns but 1000 times as big.

I fully expect CONgress to do either the stupid thing #1 or to be complicit in the corrupt thing #3.

[edit on 6-5-2008 by jefwane]
Edited to correct some grammar and clarify some points.

[edit on 6-5-2008 by jefwane]