Here Comes the Cavalry

I’d like to open this post by thanking each and every one of you for bailing out my industry’s big brother and sister, Freddie Mac and Fannie Mae. I really appreciate you paying your taxes in a timely manner to a government that has fully embraced the “too big to fail” concept of our financial markets and is willing to rob Peter (you) to pay Paul (Wall Street). It’s like Robin Hood…only backwards. And no one is wearing tights. And nobody could qualify as “merry.”

Am I jumping to conclusions? Quite possibly. I wouldn’t be surprised one bit if half of our politicians regularly wear tights (and I think that is a mental image we can all appreciate). But let me shed some light on how I view the past couple of weeks and let you folks draw your own conclusions.

In another crisis of confidence, the financial solvency of Fannie Mae and Freddie Mac was called into question two weeks ago. For those just joining us, Fannie and Freddie’s role in mortgage lending is to buy bundles of loans from banks and brokerages so that those banks and brokerages will have more money to lend. They essentially keep the inner workings of our country’s mortgage lending system well greased. If they ceased to exist, lenders would be lending their own money and would probably think a lot harder about who they wanted to lend it to. As such, guidelines would abruptly tighten and rates would shoot up. Probably not the best scenario for a housing market that is circling the drain.

So, investors flip out (as they have been known to do recently) and start vacuuming money out of Fan­nie and Freddie. Their respective stocks plunge and appear to be headed for zero. Markets brace for the impact. This is all happening on the heels of our country’s third biggest bank failure when Indy­Mac went ka-boom (in large part due to arguably sloppy mortgage lending) and got taken over by the government. And when things seem bleakest, who do we see rise up to meet the challenges of our frightened and failing markets?

It’s a bird! It’s a plane! It’s…Treasury Secretary Hank Paulson? I kinda expected someone in a cape.

Yep. Hank shows up with his unbounded ability to spend money and suggests a governmental bailout of Fannie and Freddie. To save you a pile of political jargon, here’s essentially what he is proposing: allow the federal government the infinite opportunity to buy equity in the companies (to bolster stock prices) and dramatically increase the credit lines available from the Treasury and the Federal Reserve Bank (to provide capital liquidity). Also, a 300 billion dollar fund under the Federal Housing Admini­stration is being created to help troubled homeowners.

So, with such an aggressive plan, you’d think there would be a ton of strings attached, right? Wrong. Aside from approval authority over executive pay plans and the Fed adopting a “consultative role” in overseeing their capital (whatever the heck that means), not much worthy of noting is going to change.

The House of Representatives passed the bill Wednesday and Senate followed suit on Saturday. Bush has already stated he’d sign it into law. Awesome to the max.

What this means for Mr. and Mrs. Mortgage Consumer is that the worst case scenario of sudden and ridiculous rate hikes and guideline alterations has been stemmed, at least for now. If the government is successful in their attempt to temporarily prop up the lending system, then we can expect a slow and steady decrease in rates as confidence crawls back into the mix. However, if the government gets their claws too deep into the current system of lending and overhauls the whole sha-bang OR if inflation worsens, expect growing pains through overly-cautious borrower requirements and fear-driven higher interest rates.

So, unless I missed something major (which is entirely possible), we’re gonna get stuck with the bill. It’s the lesser of two evils, I assure you. But it still stands as a monolithic event showing that we are not out of the credit crisis quite yet.

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