TheStreet.com's Jim Cramer says this plan for Fannie Mae and Freddie Mac is a positive for the market, taxpayers and homeowners.It would be very easy for me to say something like this about the federal government's plan for Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take): "The plan is a joke, it will mean nothing, the taxpayers are going to be stung and the market should be sold aggressively."
In fact, I feel like writing that. I feel like writing it because it is fun and simple and consistent with pretty much everything else every "intellectual" and "thoughtful" person was saying.
But then I reach back to my writings from last Thursday and Friday, which asked the bears if anything good could happen and what to buy, and everyone was pretty scornful or ignored me. Even as the Bank Index (BKX) turned out to be a home run to buy.
So, I am urging, without any prejudice, that bears DO NOT READ ANY FURTHER. Just join the "Jim Cramer is a Moron Club" and go switch on some football, because here is what I have to say about the Treasury plan:
It is what I have been calling for. It is what I have wanted. So I can't turn around now, even though I have been the world's most vocal critic of the Treasury, and say that it's bad.
I will first put, in plain English, what I believe this plan will help do (the operative word is help, as opposed to hinder).
1. It will help stop the root of all financial evil right now -- house price depreciation. 2. It will make mortgage money cheaper and more readily available. 3. It will slow the rate of foreclosures. 4. It will, if done right, not cost the taxpayer anything and could actually return money to Treasury through the preferred and common stock that the government is buying.
Now, let's try to pick each one of these apart, using the traditional "Cramer-is-a-moron Socratic Dialogue" between a hypothetical Cramer basher and me:
Jim Basher (JB): Jim, nothing can stop house-price depreciation because there are too many homes for sale and the demand isn't there.
Jim Cramer: Actually, we are building 60% fewer homes than we did two years ago and while the unsold inventory is up to 1991 levels -- highest in 17 years -- we have 40 MILLION more people than then, so it ain't so bad. The demand can catch up to supply if supply is shrinking and demand is pent-up.
JB: Nothing will make more mortgage money available, because the banks don't want to lend and only lower fed funds rates will lower mortgage rates.
Jim Cramer: Fannie Mae and Freddie Mac had kept rates abnormally high, so getting them out of the way will help lower rates. I agree that the Federal Reserve should loosen and can loosen because of the commodities collapse and the strong dollar. What you have to think of is what was happening and what can now happen. Before this action, Fannie and Freddie were having trouble issuing paper to buy more mortgages and having trouble selling mortgage-backs because people were worried that the implicit guarantee wouldn't be explicit as no one really trusted the Treasury to do the right thing. (I had urged the Federal Reserve Bank to buy $200 billion in FNM/FRE paper but they wouldn't. This is late, and it's the Treasury, but it is better than nothing.)
Now all of those fears go away and banks will be able to sell more loans to Fannie and Freddie, and they will package them and sell them and even, at the beginning , keep some on their own balance sheets, even though that's what got mortgage rates and get more money into the system.
JB: This can't help stem foreclosures; those are from unemployment problems.
Jim Cramer: Yes, indeed, unemployment rates rising are really bad for housing. But our foreclosure problem, which has much to do with house-price depreciation, can be stemmed by cutting the principal of the loan and taking an option arms/exotic loan and turning it into a 30-year fixed loan.
Now that the government owns so many loans courtesy of the takeover, it can stop foreclosing (remember this company owns about half of the bad loans in the system), redo terms and then send the loans to the FHA, which will cause a decline in the rate of foreclosures and prompt first-time homebuyers to come back to the market to buy, less worried that the homes on the block will be foreclosed.
JB: This will cause the taxpayer to lose a fortune.
Jim Cramer: You don't know that. The taxpayer now has a huge stake in two entities with the capability of being VERY PROFITABLE if you can get rid of or work out bad loans because these two companies have gigantic fee structures that make them fortunes that will now go to you. The companies don't need to be run for extreme profit, just some profit, and we can get money back and the housing business will get better.
Look, I know the Jim Bashers won't be quelled, I make new ones every day! But if none of this means anything to you that could be remotely positive, then think like this: How does it hurt the market? Give me one way it hurt it other than some banks that own the preferred that now have to take a haircut but will be looked at with a less-than-critical focus because it wasn't their fault. In other words, there will be forbearance.
To be sure, I don't like up-big openings. Just like I buy down-big openings. I would be selling something into an up-big opening.
But given that this is the plan that I have been calling for, given that the big debt buyers like China and Bill Gross will come back to the market, given that nothing good was happening without this, I am very sorry to report: THIS IS GOOD NEWS!
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RELATED LINKS:
Treasury, FHFA Outline Fannie, Freddie Rescue
Asia Closes Up On Fannie/Freddie Rescue
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in the stocks mentioned.
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Reader Comments (Page 1 of 1)
9-08-2008 @ 9:53AM
janet said...
I think the banks should not be bailed out help the home owners instead
9-08-2008 @ 9:56AM
tom randt said...
Jim, thanks again for having the knoweledge to know what to say and the courage to say it in the face of all the "let's bash America when she's down croud" Tom R
9-08-2008 @ 10:48AM
jANET said...
THE TAX PAYERS ARE NOW GOING TO HOLD THE BAG NOT RIGHT
9-08-2008 @ 12:42PM
jj said...
I think indeed that Jim is a moron. If the natural process of the makets are allowed to take place, people that should have never joined the ranks of home ownership in the first place, will back to renting and the ones with the real financial means and mental responsiblity will come in and purchase all this excess inventory. They will do this when the pricess are once again reflective of what the "real" home market prices should be. This influx of buyers will increase the liquidity in the market and help to restore normal maket forces to a more healthier and true status.
These buyers will l have good to excellent credit, higher networth and overall higher financial means than the ones that are loosing their homes to foreclosure. These folks never should of been in these homes to start off with.
By the Gov. to intervene, a precident will be set if not in practice, at the very least mentally, that the Gov., will assist with future bailouts from recklessness in the financial markets. This is very dangerous.
It is hard to see a lion in the wild attack and eat a baby antelop or the like. The reality is that this is nature working the way it's supposed to. We have no right to intervene and stop this no more than we have the right to stop what is going on with our financial makets. Although hard and difficult to see people loosing their homes, it will be even more dangerous and catastrophic for our financail markets to keep people in homes they cannot afford to be in.
9-08-2008 @ 2:02PM
Jay said...
I'll promise not to be a "Jim Basher", but in return, you've got to help me understand how this bailout is a positive for ME (and others just like me). Who am I?
I'm a middle class taxpayer who followed the rules. I started building my credit score as a teenager by taking (and paying) small loans and managing small amounts of credit card debt. Income was not always plentiful, but my bills were always paid. Eventually, I worked my way up to a car loan, then a first small home that was within my means (with a fixed rate mortgage). Finally, after years of building credit and equity, I sold off the small home and bought a larger home with 20% down on a fixed rate mortgage... again, with payments that represented a reasonable fraction of my income.
Bottom line, I'm in a home that I can afford. Along the way, I avoided risky loan terms because I read the fine print and saw the many bad things that could happen.
So after many years of playing it safe to avoid putting myself or my family into a bad situation, what do I get for it? What does this bailout do for me? What does it do for a middle class, modest income taxpayer living within one's means?
I anxiously await some enlightenment.
9-08-2008 @ 3:11PM
vanyali said...
I don't think that the GSEs, even under conservatorship, can just decide to modify people's exotic loans and turn them into 30-year-fixed loans. They don't own any of those, and even the conforming (i.e.: fixed rate) loans that they have bought, they re-packaged and sold off to the market. The way I see it, this takeover doesn't do anything to help rewrite the terms of anyone's mortgage.
9-08-2008 @ 5:13PM
joe said...
once again our great goverment found a way to take out the little guy and help them selves as they tell you they are doing it and then they plan to jump ship what is the pos. that you will see these faces in the banking systems
the little tax payer
9-08-2008 @ 7:55PM
Joe said...
This will cost American taxpayers a half a BILLION DOLLARS. While it will probably save the homes of people who could not afford them in the first place, think of how many of the Social Security aged crowd will be losing theirs as their taxes rise in great disproportion to their fixed incomes and they can no longer stay in them.