A new era in mortgage lending begins today as Fannie Mae and Freddie Mac transition from Government Sponsored Enterprises to "government owned" and managed entities. The implicit guarantee behind Fannie and Freddie that we've known for decades is now explicit. The CEOs of both companies have been replaced and the companies have been moved into conservatorship by the U.S. Government. So this means the US government owns more of your home than most home owners do.
There are many unknowns, but one thing is clear... for now, the international and domestic stock markets have greeted the "mother of all bailouts" as positive. Stocks are moving significantly higher and treasuries are getting crushed in the stampede to equities. In fact, trading volume was so high in London this morning that the computer system at the London Stock Exchange melted down. London traders have been without access to their computerized pricing system for more than six hours.
Secretary Paulson and James Lockhart, the head of the Federal Housing Finance Agency (FHFA), have indicated that the portfolios of the "former GSEs" must shrink to reduce future risk to taxpayers. That's a nice idea, but who will buy mortgages in this environment if Fannie and Freddie decelerate their purchase activity? And, what kind of mortgages will Fannie and Freddie be buying in the future? Will they take on more or less risk? Will they continue to be saddled with the obviously impossible dual responsibilities of creating shareholder value while meeting the affordable housing goals of our government? Congress needs to define the roles of these two companies for the long term.
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