Uncle Sam Is the Housing Market

When it comes to clinging to an outmoded paradigm in the face of public anger and all evidence to the contrary… Hosni Mubarak has nothing on the US Treasury. At least he had the good sense to step down.

For their part, the US Treasury is out this morning with a grand plan to “reform” Fannie Mae (FNMA) and Freddie Mac (FMCC). Indeed, they plan to phase out the infamous government-sponsored enterprises (GSEs) and give the private sector a greater role in mortgage finance.

The problem at present is best captured in this chart:

Whether it’s Fannie, Freddie or federal agencies, Uncle Sam is the housing market…accounting for nine out of 10 mortgage originations in the past year.

When we forecast in 2004-2005 “the total destruction of the US housing market”, the suggestion was met with more than a snicker. Yet as this chart reveals…without government-sponsored activity, we were dead-on.

Now, Mr. Geithner and his minions are mulling over three options to wind down Fannie and Freddie over a period of 5-7 years. We’ll spare you the details, because the details are rendered more or less irrelevant by this passage in their 32-page report:

“Our commitment to ensuring Fannie Mae and Freddie Mac have sufficient capital to honor any guarantees issued now or in the future and meet any of their debt obligations remains unchanged. Ensuring these institutions have the financial capacity to meet their obligations is essential to continued stability, and the administration will not waver from its commitment.

“Given Fannie Mae and Freddie Mac’s current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery.”

Translation: The blank check the Treasury gave Fannie and Freddie (on Christmas Eve 2009, when no one was supposed to notice) remains in force. No one – certainly not the lenders who knowingly fobbed their crappy mortgage paper onto Fannie and Freddie – will be allowed to feel any pain.

Well, no one except taxpayers, who remain on the hook for $134 billion.

About Addison Wiggin 88 Articles

Affiliation: Agora Financial

Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, a multi-million dollar financial research firm and publishing group based in Baltimore, Maryland. His second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated.

He is also the executive producer of and a writer of I.O.U.S.A. a feature length documentary film nominated for the Grand Jury prize at the 2008 Sundance Film Festival. The film is inspired by the international bestsellers Financial Reckoning Day and Empire of Debt, which he coauthored with Bill Bonner.

Visit: The Daily Reckoning

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