An Armageddon Aptly Avoided (The Grand Finale)

It’s the weekend, so I’ll keep this brief.

What can we expect in the future from this Fannie and Freddie takeover?

Between now and the swearing in of our next commander-in-chief, probably not much beyond the initial restoration of confidence.  Money will flow through mortgage-backed securities in a cautiously optimistic manner the same way it has during this entire credit crunch.  This will mean a steadying of mortgage prices around current levels.

As such, we will not see any more enormous impediments to growth coming out of these two compa­nies.  Home prices therefore have the opportunity to find a bottom more quickly.  Now, I don’t expect home prices to immediately start appreciating once that bottom is found.  However, a flattening out of prices would stimulate demand for housing in a huge way and bring all those sidelined investors back into the market.  Hopefully, this will help soak up the glut of foreclosures we’ve seen lately.

Freddie MacThe stock values of the two companies have been effectively trashed through the process.  In an act of contrition, it was announced that the dividends that were recently eliminated will in fact be paid out to investors this quarter.  So, they drop the stock about 85% overnight and then try make up for it with a paltry little quarterly payout.  Gee, thanks.  I’m sure that the hedge funds filled with millions and mil­lions of those shares are really…. appreciative of the gesture.

Whether the conservatorship that Fannie and Freddie have been placed under will remain in effect or if it will convert into a full-on nationalization (which would kick out all private investors and eliminate their stocks from existence) remains to be seen.  Regardless, John Q. Public is going to have a tougher time qualifying for a loan over the next few year than he would have had without this massive inci­dent.  Loan costs are probably going to go up in order to offset losses endured from other bad loans.  Loan rates are most likely going to stabilize at these current low levels.

So there.  Now you know.  And knowing is half the battle.

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