“Unlimited” Support For Fannie Mae (FNM) And Freddie Mac (FRE)

Print Email

The Treasury Department announced that it would give Fannie Mae (NYSE:FNM)and Freddie Mac (NYSE:FRE) “unlimited” financial support for the next three years, which seems like an awful lot. Some members of Congress said the Administration made the announcement as people were busy with holidays and travel. It is unlikely that the decision will go unnoticed simply because of its timing.

The previous cap to funding for the two mortgage firms was $200 billion each through 2012.  Fannie Mae has drawn $60 billion of that and Freddie Mac $51 billion. It would seem that extending the amount of support to “unlimited” would not be necessary based on the rate at which the companies are subsidizing losses now.

The Administration views Fannie and Freddie as critical weapons necessary to get the housing market back on its feet. Almost nothing else the government has done has borne much fruit. Mortgage modification programs have not stopped the rise in default rates and foreclosures. The first-time home buyers credit has had only modest impact on home sales. Mortgage rates are beginning to move up despite the efforts of the Fed to keep interest rates low.

The two firms own or guarantee a huge portion of the home mortgages in the US, many of which have defaulted. The Administration’s theory is that if Fannie and Freddie can take the risk of adding to their balance sheet burdens in a bad housing market, these two agencies can put a safety net under the home loan market. The core of the solution is simple. The federal government will risk more taxpayer money to keep the real estate ecosystem stable.

The trouble with the program is equally simple. It is another weight for the working American to bear as a larger and larger part of his income will eventually have to go to offset the national deficit, pay for healthcare reform, and pay down America’s debt.

Stable home prices may be overrated. Every month that there is an artificial barrier that prevents real estate prices from falling faster is a month that the market does not reach rock bottom, and rock bottom prices are what eventually bring buyers into the market. Real estate prices are being destroyed by the current  “hundred year storm” in the industry and buyers will find the bargains irresistable, even if mortgages rates are not at a historic low. The government can draw out that process unnecessarily instead of standing aside as it takes it natural course.

The taxpayer will write a check to Fannie Mae and Freddie Mac in the name of keeping real estate prices from falling. That taxpayer might buy a house with his check, but the government is keeping home prices too high.

Douglas A. McIntyre

RSS Facebook Twitter