As the Senate put the final touches on its plans to eventually nationalize health care in the country, the Obama administration via its Treasury Department quietly completed the government takeover of the housing industry.
On Christmas Eve, Treasury announced that it would provide unlimited support to Fannie Mae (FNM) and Freddie Mac (FRE) for the next three years. All losses they incur will be funded by the taxpayer and instead of mandatory reductions in their mortgage portfolios, the two will be permitted to once again grow their asset base.
Given that there currently exists no meaningful private market for mortgages in this country and the last pretense towards Fannie and Freddie as private entities has been stripped away, it seems pretty clear that from this point forward the control of residential mortgage finance has been ceded to the federal government.
In real estate, finance is the tail that wags the dog. Control of the means of financing confers control over the product that is produced. With an effective monopoly on financing, the government can dictate the type of product the industry produces. How green, how large and even where housing is to be developed can all be directed by the simple imposition of the terms under which mortgages will be made. And, as if that were not enough, the housing industry will more than ever become a reliable supplier of cash to the political class.
In hindsight, it was not hard to see this coming. Despite all of the talk of re-privatizing Fannie and Freddie, or splitting them up into smaller more manageable entities, this political plum was just too tempting to pass up. Fannie and Freddie were never the independent private entities that they pretended to be, but at least that fig leaf served to hold the power seekers somewhat at bay. Those days are over and you can be sure that the Barney Franks of the world will no longer feel constrained from advancing their agendas through their control of the levers of finance.
But what does it mean for the immediate future? The Business Insider has a good, short-list of possible implications. You can check them out for yourself but I did find the first item of interest:
Revisions to the flagging Homeowner Affordable Housing Program (HAMP). Any changes will likely increase near term bailout costs to Fannie and Freddie if HAMP’s current reliance on interest reduction is replaced in part by principal reduction. The losses associated with a modification of a loan using an interest rate reduction are spread out over time while a modification using principal reduction results in taking a more immediate loss.
In an attempt to limit the damage that the economy does to their majority in the 2010 elections, the administration is likely to go all in on mortgage modifications that require principal reduction. They can only take so much skin off of the banks in this effort and the last thing they want is to put the financial system back in another crunch. This leaves Fannie and Freddie as the vehicles to bail out homeowners that so far have resisted efforts to “save” them. It makes perfect sense that the Treasury’s announcement of unlimited support would be followed by a big, new homeowner bailout program.
Where this goes beyond the immediate future is anybody’s guess. It’s probably not too cynical to suggest that having gained control of such a vital sector of the economy, prying it loose from government control will not happen easily. Certainly, more rather than less housing foolishness is likely to ensue.