Fed Seizes Fannie & Freddie; Thoughts?

[JTWood]

Synopsis of the gov't (i.e. - taxpayer) bailout:

NEW YORK (CNNMoney.com) -- Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

The move, which extends as much as $200 billion in Treasury support to the two companies, marks Washington's most dramatic attempt yet to shore up the nation's housing market, which is suffering from record foreclosures and falling prices.
...
Freddie CEO Richard Syron and Fannie CEO Daniel Mudd will no longer run the agencies, while the FHFA will assume control of the boards. Regulators took care not to foist blame on the two executives, adding that they would stick around to help with the transition.

Syron and Mudd will be replaced by two finance veterans charged with restoring the mortgage titans to health. Herb Allison, the former chairman and CEO of pension provider TIAA-CREF, will head Fannie Mae. Allison formerly served as president of Merrill Lynch.

David Moffett, who served as vice chairman and chief financial officer of U.S. Bancorp until early 2007 and then joined the Carlyle Group private-equity firm as a senior adviser, will take over Freddie Mac.

At the same time, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually. All of the firms' lobbying and political activities will be halted immediately and charitable activities reviewed.

In addition, the Treasury Department announced a series of moves targeted at providing relief to both housing and financial markets.

CNN's take on the bailout's impact on regular people:

Mortgage applicants rejoice!

Sunday's federal takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit, experts said. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage.

"This could be good for would-be homeowners," said Tom LaMalfa, managing director, Wholesale Access, a research and consulting firm. "It would reduce the cost of financing at the new and improved Fannie and Freddie."

Assuming that's true, I'll be looking to refi shortly. After all, it's my money that bailed them out. Why not get some of it back?

Anyway, thoughts on how the market will take this? Is this a good idea in general?

[Yoda]

Great so our government goes further into debt because of greedy corporations and people who can't manage their money.

[JTWood]

Great so our government goes further into debt because of greedy corporations and people who can't manage their money.

This may not be the corporations entirely. The mortgage brokers are probably the most responsible sector of the mortgage process when it comes to the current state. A lot of them had no problem helping people pump up their numbers to get mortgages they shouldn't have ever received.

[bleach168]

From ABC news:

Last year, Freddie Mac paid Chairman and Chief Executive Richard Syron nearly $19.8 million in compensation even though the mortgage company's stock lost half its value. During the same period, Fannie Mae President and Chief Executive Daniel Mudd got compensation valued by the company at $12.2 million, including a $2.2 million bonus.

[JTWood]

Don't you love that stuff?

[Simulacrum]

Interesting, it seemed the govt was going to let these two try to right their own ships for a while. It seemed a little odd to leave the original management in power of the two companies who played such a huge role in the dump of our economy.

[jfg]

I'm clueless about this stuff and I shouldn't be. I've never even looked into buying a house so I have no idea how the market works or how it affects the country. All I know is a lot of people are in a bad place right now. Seriously, I try to stay on top of everything and this kind of stuff just flies right over my head.

[Old_Style]

I'm clueless about this stuff and I shouldn't be. I've never even looked into buying a house so I have no idea how the market works or how it affects the country. All I know is a lot of people are in a bad place right now. Seriously, I try to stay on top of everything and this kind of stuff just flies right over my head.

Same here.
I first heard of Fannie Mae a year or so ago and I thought they were talking about the chocolate maker.

[jfg]

I only know Sallie Mae and was hoping my student loans would disappear... No just kidding, I'm not that dopey.

[JTWood]

It's actually pretty simple. When you get a home, here's the "basic" process:

1. Your broker facilitates a loan that is issued by a bank.
2. That bank can sell the mortgage to one of these two companies.
3. These companies use those mortgage notes to sell mortgage-backed securities; a theoretically stable asset.

These companies make money because they essentially get a sweetheart deal from the Fed when it comes to the rates they are charged on the money they borrow. In short, they pay less for money than anyone else, so they can afford to buy and resell mortgages that were sold at even the cheapest rates.

In theory, these two institutions help keep banks liquid and thereby reduce violent swings in the capital market. What screws them up is that they aren't necessarily run like a business. They're run more like government agencies, which means some of their decisions aren't what's best for the economy. They're often what's best to keep tptb elected.

This bailout essentially says that these two companies have no chance of standing up on their own, and it gives a substantial sum of taxpayer money to them to make up for the mistakes they've made that were mostly of their own doing (lowering lending standards, for example). This decision also means that the banks that gave out bad loans, be it to people with a lack of financial savvy or simply to high-risk borrowers, are getting a tax subsidy that actually paid them retroactively as a "reward" for not properly costing those loans at the point of issuance.