Wednesday, February 27, 2008

Taxpayers Will Foot the Housing Bailout

In case you were wondering who would pay for the housing mess -- it's you and me. Not that there was any doubt about that in the end, but it sure was nice to think that maybe the people who got us into this mess -- the mortgage brokers who didn't perform any credit checks, the banks who didn't look at the collateral they were buying, the investment banks who didn't look at the collateral and the ratings agencies who gave everything a giant thumbs up -- would bear some responsibility.

First, let's look at how Fannie Mae is doing:

Fannie's $3.56 billion quarterly loss contrasts with a profit of $604 million in the same period a year earlier. The loss was equivalent to $3.80 a share, and compared with a profit of 49 cents a share a year earlier. Thomson Financial said Wall Street analysts had expected the company to lose $1.24 a share in the latest period.

"We are working through the toughest housing and mortgage markets in a generation," the company's president and CEO, Daniel Mudd, said in a statement. He said the company's losses reflected "the significant decline in home prices in a number of large regional markets and the growing number of borrowers struggling with their mortgages."

Mudd called 2008 "another tough year."

They lost a ton of money. So -- here's a great idea -- let's let them increase the amount of risk they can take on!

The regulator for mortgage-finance giants Fannie Mae and Freddie Mac said Wednesday it would lift a cap on the two companies' investment portfolios on March 1.

The announcement from the Office of Federal Housing Enterprise Oversight came just hours after Fannie Mae was able to successfully file its 2007 financial statements on time Wednesday morning. Freddie Mac is expected to report its full-year 2007 results Thursday.

Shares of both Fannie and Freddie surged on the news. In late morning trading, Fannie shares were up $3.14, or 12%, to $30.11, while Freddie was up $2.14, or 8.5%, to $27.35, both on the New York Stock Exchange.

The inability of both firms to file their audited financial statements in a timely fashion was one of the major reasons Ofheo had placed a cap on the companies' retained mortgage portfolios. Now that Fannie Mae and Freddie Mac are able to successfully file on time, the caps are no longer necessary, Ofheo Director James Lockhart said in a statement.

Ladies and gentlemen -- the financial markets are frozen right now and for a damn good reason. Over the last 7 years -- and especially over the last 3 years or so -- a ton of bad loans were made. They were dressed up in complicated structures that were supposed to mitigate risk, but that didn't work. As a result every major financial player -- every bank, insurance company, brokerage firm etc.. -- has come out and said "we have a ton of bad loans on our books that aren't worth as much as we thought." This means there is a strong fear of default, meaning every lender on the planet is concerned that every borrower is in a fact a default risk. That's why the credit markets have frozen. And they should be frozen right now. That's the price you pay when you let really stupid policies run rampant in the economy.

But now the government is going to let two quasi-public institutions -- both of whom are having financial problems -- start buying more loans. Brilliant. And when it becomes obvious that Freddie and Fannie are losing more money, guess who will provide the bail-out? You and me.