With parents around the nation struggling to make ends meet during tough economic times, why should they care about the federal government’s expected takeover of Fannie Mae and Freddie Mac later today?
On the surface, homeowners have reason to believe this a good thing: The Bush Administration, as well as the McCain and Obama campaigns, are all touting the takeover as a way to prevent a truly colossal meltdown of the housing and credit markets, reports The New York Times.
Is this an over dramatization? It seems not, because Freddie and Fannie are just about the only financial institutions underwriting home mortgages in large quantities. If these two companies implode, home buying in this country might come to an effective stop.
Sure, some banks and credit unions would continue to underwrite home purchases, but so many potential homebuyers would be forced to sit on the sidelines that price cutting is likely to accelerate.
The more home prices drop, the more struggling homeowners are likely to give their house to the bank – or in this case Freddie and Fannie – further swelling inventory. Can you say death spiral?
Since Freddie and Fannie own or back $5.3 trillion in mortgages that might sour, the federal government realized that it would be on the hook whether it commandeers the companies over or not.
It would seem the U.S. government has no choice but to take over the two quasi-government companies. So as home buyers let out a big sigh of relief, taxpayers should be truly worried.
For the takeover to work, the federal government is taking on two key roles: taxpayers will be responsible for Freddie’s and Fannie’s considerable and expected losses. The Congressional Budget Office predicted in July that a bailout could cost between $25 billion and $100 billion, reports the Los Angeles Times. The two companies lost about $14 billion last year.
But that’s just the loss side of the column. The other big taxpayer expense will be the immediate need to infuse the companies with cash so they can continue buying mortgages. Failure to do so would doom the housing market for the foreseeable future.
Should the federal government engage directly in a purely capitalistic part of the economy? While I do not harbor the “capitalism-at-all-costs” mentality, why should the U.S. government be involved in home buying instead of health care, which at least can be viewed as a social responsibility?
And no matter how you look at it, the costs of this bailout will be passed on to future generations on top of the considerable debt this nation already has incurred. I can’t help but wonder how the presidential candidates can be promising tax cuts? Factor in two ongoing wars, and the math is pretty obvious: This bailout is going to raid the American wallet in a very direct manner, either through taxes or economic pain, sooner or later.
The Bush Administration announced it has taken over Freddie and Fannie, reports The New York Times:
The rescue package represents an extraordinary federal intervention in private enterprise. It could become one of the most expensive financial bailouts in American history, though it will not involve any immediate taxpayer loans or investments.
The plan also commits the government to provide as much as $100 billion to each company to backstop any shortfalls in capital.
Supposedly Fannie and Freddie will someday pay the government a 10 percent dividend on new stock, but that sounds a lot like a smoke screen.
Like I said in the original post, taxpayers should run for the hills.