Economist Glen Langan told BloggingStocks Monday the bill's two key components are the assistance to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), and a new Federal Housing Administration program. The former, Langan says, "represents an implied guarantee" of Fannie and Freddie by the U.S. Government, which should restore confidence in each, and in the secondary mortgage market. Banks and other mortgage lenders, he said, "will now be more willing to write conforming loans, knowing that Fannie and Freddie will have the funds available to purchase and back these loans."
The latter, a Federal Housing Administration program that enables banks to sell to the U.S. Government mortgages unlikely to be repaid, "will help stem the tide of foreclosures that's plaguing the housing sector," as well as "relieve banks/lenders of less-than-stellar to non-performing assets," Langan said.
Beginning of the end of the housing slump?
Some House and Senate Republicans, and a few Democrats, among others, have chaffed at the bailout bill's cost and ultimate impact on the U.S. taxpayer. House Republican leader U.S. Rep. John Boehner, R-Ohio, told Bloomberg News the bill did not reform Fannie and Freddie enough, and will leave taxpayers with a bill for "billions and billions of dollars." Langan said Rep. Boehner's concern is legitimate.
"[U.S. Rep] Boehner's concern is a valid one. The housing bailout could become an even larger housing-related outlay than the housing bailout in the late 1980s with the Resolution Trust Corporation," Langan said, adding that the bill "could add more than $500 billion in federal spending in less than five years."
Nevertheless, the alternative, in Langan's interpretation, is far worse. Closing Fannie or Freddie, or preventing them from buying mortgages is not an option, he said. Further, a failure by Fannie or Freddie would be interpreted by institutional investors as a failure by the United States Government to back its debt, he said. "This would send a shock wave through the credit and bond markets. The dollar would plunge. The [U.S.] stock market would sustain its worst losses in decades, as would international markets," Langan said. "These events would produce the worst [U.S.] economic recession since the early 1980s, perhaps since the 1930s."
Langan added that, due to widespread borrower and lender errors during the housing boom, the U.S. Government and, by extension, the U.S. taxpayer, is now left with remedies that are "a) not very good and certainly very costly, b) horrible, or c) catastrophic."
"It's a mess, and the cleanup will be costly for taxpayers. But one thing we can not do is sit here and watch the housing slump jeopardize the productive and functioning sectors of the U.S. economy," Langan said. "So in that sense the Fannie/Freddie bailout, by averting a major economic tragedy, marks the beginning of the end of the housing slump."
Economic Analysis: Stark, but sage advise from economist Langan: the cost of the housing clean-up will be enormous, and the policy reforms no easier to implement. For example: What policy reforms will prevent lenders from making reckless loans without hurting their ability to grow their loan portfolios / expand their business? And what policy changes will restrict mortgages to those likely to repay them, without preventing first-time home buyers from buying a home? And should the United States, as some have suggested, end the mortgage system? Answers to these questions will take years to formulate. In the mean time, as Langan advocated, let's keep Fannie and Freddie functioning, to prevent a tragedy.
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Reader Comments (Page 1 of 1)
7-28-2008 @ 3:17PM
richard clark said...
the bail out will do no good. it's throwing good money after bad. more money will not solve the problem. they will lose that too. the dollar will devaluate and there will be treasury bonds cashed in like mad. better get on the wagon with the smart money and buy swiss francs.
7-28-2008 @ 3:29PM
KEN said...
GRAB YOUR CASH IT S GONNA CRASH DO DA DO DA
BROKER S STEALIN ALL YOUR CASH DO DA DO DA DAY
STEALIT IN THE MORNING STEALIT IN THE NIGHT
GRAB YOUR CASH IT S GONNA CRASH DO DA DO DA DAY
7-28-2008 @ 3:36PM
KEN said...
GRAB YOUR CASH IT S GONNA CRASH DO DA DO DA
BROKER S STEALIN ALL YOUR CASH DO DA DO DA DAY
STEALIT IN THE MORNIN STEALIN AT NIGHT
GRAB YOUR CASH IT S GONNA CRASH DO DA DO DA DAY
HEY EVERY BODY SING HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA
7-28-2008 @ 3:39PM
william lindblad said...
"The latter, a Federal Housing Administration program that enables banks to sell to the U.S. Government mortgages unlikely to be repaid, "will help stem the tide of foreclosures that's plaguing the housing sector," as well as "relieve banks/lenders of less-than-stellar to non-performing assets," Langan said."
THE ABOVE IS A RAPE OF THE TAXPAYER AND PROMOTES DISASTER - IT IS ALSO A QUOTE TAKEN FROM YOUR POST.
This is basically saying that people who speculated on property that is NOT a residence, will now qualify for government help. THAT IS NOT AT ALL WHAT IS CONTAINED IN THE PRESENT HOUSING ASSISTANCE BILL. While I have not read the bill in depth, I doubt that Congress is going to be willing to assume all of the speculative housing market debt that includes condo and other multi unit construction, nor will it include the luxury end of the market.
U.S. Rep. John Boehner, R-Ohio, told Bloomberg News the bill did not reform Fannie and Freddie enough, and will leave taxpayers with a bill for "billions and billions of dollars." Langan said Rep. Boehner's concern is legitimate.
Since the bill did not "reform" much of anything, I don't know what this Congressman is talking about? Replacing one watchdog agency with another is hardly reform. It is going to look to me and the rest of the public like nothing more than a shell game.
If and when Congress gets down to holding hearings on HOW and WHY this mess got started remains. Since rules and laws were violated in a wholesale fashion the public has both a right to know and a reason to ask those in charge for an explanation. I for one want to know why the watchdog agency, OFHEO, did not live up to their mission statement. I would like to know why Fannie and Freddie were into the jumbo mortgage business which is well in excess of their stated 417,000 limit?
That is the problem with the housing assistance bill - it is attempting to sweep all the dirt under the rug. I hope that the press gets into this and starts to call for public accounting. It would appear that many in Congress have something to hide.
7-29-2008 @ 1:52AM
Gary E. Sattler said...
Egads people, do you need a rock to fall on your heads?
The problem is: REDUCED PUBLIC SECTOR INCOME!!!
How long did you think that the taxing authorities could take an increased percentage here and an increased percentage there, while working wages failed to keep pace with inflation, before we'd lose solvency as a public???
Don't you get it yet? We at the ground level no longer have the funds as a public to float this boat! We've been exploited, tapped, stripped, and wrung out.
All these taxpayer funded bailouts are just accelerating our national economic demise. You can point fingers at the banks and businesses all you want, but you should be pointing them at Pennsylvania Avenue.
The irony of the whole thing is that the legislation which is crushing your children's future has all been drafted and enacted in YOUR name.
9-23-2008 @ 10:09PM
annette said...
What if nothing is done, will it help?
I don't think so. As a matter of fact I think FHA - HUD needs to establish a new program immediately. The "Foreclosure Bailout Loan" with normal, guidelines where homeowners with jobs can refinance their current mortgage loans. They need to use part of the Congress bailout money to actually go toward this program. Put their money where their mouth is. This may stop some of the foreclosures, it may stop more unemployment, more banks closing causing more unemployment and foreclosures.
It can be done but TODAY. Not 5 months from now. Someone needs to get off their tail and think this through. Is anyone thinking out there. HELP!! Ideas anyone.
10-03-2008 @ 3:00PM
Judy said...
FREDDIE MAC AND CHASE HOME FINANCE LLC, STOLE MY HOME!!! THEY COMMITTED FRAUD, PUT OUR MONEY INTO SUSPENSE ACCOUNTS(FOR UNKNOWN REASONS), AND WE STILL DO NOT KNOW WHERE THOSE THOUSANDS OF DOLLARS HAVE WENT!! OUR PRINCIPAL BALANCE ACCORDING TO "THE NOTE" WAS THE BALANCE IN JUNE OF 2007 THAT IT SHOULD HAVE BEEN IN JANUARY OF 2008. YET IN OCTOBER OF 2007, THEY FILED FORECLOSURE ON US AND THE JUDGE GRANTED IT!!!! I CONTACTED DEPT. OF FINANCIAL INSTITUTIONS IN OUR STATE WHICH DIRECTED ME TO THE O.C.C. I SENT TWO EMAILS PRACTICALLY BEGGING THEM FOR HELP, AND TO NO SURPRISE I HAVE HEARD NOTHING YET!!!
I HOPE THAT CHASE HOME FINANCE LLC AND FREDDIE MAC ARE INVESTIGATED AND HELD ACCOUNTIBLE FOR THE FRAUD AND THEFT THEY HAVE COMMITTED AGAINST THE CONSUMERS WHO WERE ALREADY STRUGGLING!!!