Will the Bailout Alleviate the Housing Crisis?

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 |  Includes: FMCC, FNMA
by: Dr. Bill Conerly

Is it going to help solve our housing crisis? Some analysts think that Fan (FNM)/Fred's (FRE) borrowing costs will not drop, much of which will be passed on to new mortgage borrowers. Let's see if that looks like it will solve the housing problem:
RMMtg
Gee, it doesn't look to me like the problem is high mortgage rates. Maybe the problem is something else. Like this:
VacancyOwned
Ah, that's it. Too many houses. Now if we had a federal demolition agency, that might help. (Actually, we do. It's called HUD. But it's not much help.)

Bailout? Whenever we hear "bailout," we should be clear about who is getting bailed out, and of what. Fan/Fred shareholders are NOT getting bailed out. This makes the bailout look appropriately harsh to Wall Street fat cats. The true bailout is to the holders of Fan/Fred bonds. They bought those bonds to earn HIGHER YIELDS than they would have received on U.S. treasury bonds. They knew the higher yields were not typos. The higher yields were compensation for holding a security with more risk than a treasury bond. So if the bond-holders knew they were buying bonds with risk, why would we bail them out? Why would the federal government use taxpayer money to bail out bond-holders who knew they were taking on risk?

The official answer is to keep financial markets calm. Unfortunately, the government is sending its fire trucks to the conflagration, all the while spilling gasoline as they go. By telling investors not to worry about risk, they are encouraging risky behavior and expectations of future bailouts. Look for more crises to come.

Implications for business planning: Do not expect the housing market to turn around. Look for prime mortgage finance to become just a hair easier, though there hasn't really been a problem with prime credit quality, 20% down payment mortgage availability.