Sep 09 2008
What Does the Takeover of Frannie and Freddie Mean to You?
Last Sunday it happened. The Treasury Department took over Fannie Mae and Freddie Mac, the two largest mortgage holders in the world. The combined mortgage holdings of these two giants is just north of $5.4 Trillion. That is a lot of money no matter what country you live in.
The good news is that the takeover will help to stabilize the markets that have been shaky for months, wondering if these two companies would survive the mortgage meltdown that is occurring here and around the world. The bad news is that it may make it more difficult to get a loan for a home or a business in the months ahead because the plan requires both entities to sharply reduce their mortgage holdings in the future.
The moves by Treasury and Congress a few months ago was designed to allow these companies to increase their lending in both dollars and the size of loans in order to provide some liquidity to the distressed mortgage markets. With the takeover and reduction in portfolios, money will now be exiting the markets instead.
There is also danger in the banking sector as most banks still have not disclosed the extent of the losses from bad mortgage loans on their books. I did notice in the paper this morning that mortgage rates dropped yesterday on the news of the takeover and may go still lower in the future but that is hollow news if the banks and lenders are still unwilling to make loans on any terms.
You see, banks can leverage every dollar deposited by ten times. If they have $1 million in assets they can lend out $10 million. For every dollar that a bank or lender writes off the books he must reduce his leverage or increase his deposits. Right now banks are in a squeeze and you and I are caught in the middle of it.
How did we get into this mess? The blame lies in two areas, from my perspective. First, Wall Street allowed the formation and sale of all of these loans as if they were all AAA credit worthy. Second, Congress took money, lots of it, from Fannie Mae and Freddie Mac to look the other way and make excuses for their risky actions and they are still making excuses today. It is probably high time that we start holding someone responsible for this mess since we, the taxpayers, will end up paying for all of it.
So what can you do? Stay liquid, keep your credit on solid ground and educate yourself about what your public representatives are actually doing.
We will come through this because we always do. We are the United States of America and we will survive and prosper but the time for taking undue risks is over and we should stand together in making the future more stable for future generations.
To your Prosperity
Marc
