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July 22nd, 2008

Fannie and Freddie – Public Risk, Private Profit

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For those of you out there asking, “I thought this Fannie and Freddie business happened a couple weeks ago? If Fannie and Freddie are so essential to the survival of our housing market, why hasn’t anything been done yet; what’s the problem?”

The problem is the government can’t agree on how to fix the problem. The “rescue” plan has been looped into an ongoing housing bill being bounced around Washington. Just this morning, Treasury Secretary Henry Paulson made another statement urging lawmakers to pass legislation that would allow the government to financially support the two quasi-government structures if necessary. The Fed rescued Bear Stearns and that seemed to work out fine. So again, what’s the hold up?

Lawmakers on both sides of the coin seem to hold serious reservations about what a government-assistance program could cost taxpayers.

From the Associated Press:

WASHINGTON (AP) — Congress’ top budget analyst says a federal rescue of troubled mortgage giants Fannie Mae and Freddie Mac could cost taxpayers as much as $25 billion.

Since Fannie and Freddie are Government Sponsored Enterprises (GSE), they remain part public, part private, an attribute that draws considerable speculation, since the potential for profit benefits company heads, while the potential for failure rides on the backs of taxpayers.

From CNBC:

“While the subprime mortgage crisis is hardly the fault of these companies, past practices of awarding huge bonuses and higher executive salaries calls into question the prudence of extending an unlimited credit line of taxpayer money to the companies whose management practices have been questionable over recent years,” Casey said in a letter to Treasury Secretary Henry M. Paulson.

Paulson’s main objective, which remains solely to promote stability in federal financial markets, continues to defend the need for the government assistance.

From CNBC:

“Because of their size and scope, Fannie and Freddie’s stability is critical to financial market stability,” Paulson told an audience at the New York Public Library. “Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy.”

There’s no doubt that, Fannie and Freddie are essential to the survival of our housing market and a vital part of our economy. Until the housing rescue bill is passed, we may not see a definitive solution, or know how much a rescue could cost. That being said, supporting a company where you see zero compensation (except for the fact that you’re helping your Federal government stay afloat) is a tough pill for taxpayers to swallow.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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