Government takeover of trouble lenders necessary evil

Is the federal government's bailout of Fannie Mae and Freddie Mac a necessary adjustment to stabilize the shaking credit and housing market?

Or does it herald inefficient and costly meddling of government in private enterprise?

It's probably both. But we didn't have much of a choice. These two companies have become so important to priming the housing market in Florida and elsewhere, we couldn't afford to let them fail, even if it costs the taxpayers tens of billions of dollars. Sounds a lot like the Savings & Loan crisis of 20 years ago.

Congress created the two companies to help more Americans buy homes. They now provide money for about 3/4 of all new home loans. They do so by buying loans from the private market. That's what got them into trouble. Countrywide Financial Corp., recently bought by Bank of America, supplied the most loans to Fannie Mae, about 29% of its business last year. Freddie Mac also relied on Countrywide, but to a lesser extent. As you know, Countrywide made tons of the risky loans that helped sink the housing market.

Though we dwell on the housing market here, the real estate and credit markets are obviously attached at the hip. I've got dozens of stories of house hunters who've found an inexpensive house but can't get a loan. Though exaggerated by builders and Realtors, the subprime meltdown last summer really did seem blot out the first rays of a tentative recovery.

Of course, it's one big chicken-and-egg quagmire: People bought overpriced homes with stupid, short-sighted loans. Prices necessarily fell. Unable to make their payments or refinance, people let homes drift into foreclosure. Banks lose their shirts and tighten credit. Home sales get worse.

Here's a pretty interesting take from the Wall Street Journal.

Comments

[chase]

Hi Jim,

I think a lot of the blame lies at the feet of the "everyone deserves a home of their own" crowd.

Fact is, no, not everyone deserves a home. Some people have a history of not paying back their debts. Some people have irresponsibly borrowed themselves into the next century. And some, sadly, just don't make enough money at their jobs.

When any well-meaning advocate says "everyone deserves a home" and then artificially stretches the blanket every which way to make some kind of loan product available, well, we're seeing the result.

What happened to 10 percent down, minimum, and a fixed amount of loaned dollars based on demonstrated incomes.

[Steve Simon]

Depends on how you define "Necessary"...
This was the short term fix, period.
The cause for the situation (poor lending practices and enabling from the appraisal industry) are still in place waiting for an opportunity to emerge again.
Having something on the order of one investigator for 16 counties gives you an idea of how much oversight is actually given those in the mortgage broker industry. The real estate industry, the appraisal industry, and the lending industry are to "blame". Not the crazy investor that paid twice what a house was selling for 12 months earlier (to be sure the investor is an idiot) but the professional is not supposed to let the single male on a commission job, buy his fourth property with nothing down and no leases for any tenants in any of the properties they just bought!
The appraiser (in hundreds iof not thousands of cases) signed off illegally that they had visited the property and made an on site appraisal when they had not! The real estate agent (those that were greedy and bad) promised "...You can't lose, you'll flip for twice what you paid!"
The State cut back on money for human resources used to investigate and regulate the above industries.
None of the above has changed!
The Government has provided no significant answer to the energy debacle (our economy cannot run for long with the minimum wage where it is and the cost of gas bouncing back and forth between $3.50 and $4.00), there is no additional money for enforcement and regulation, and you still get no tax credit for buying a solar water heater or a hybrid. In fact I think you still get a break if you buy a Hummer?
Perfect...
Just my thoughts:)

[Tino]

Why is it the government's role to prevent people from under- or over-paying for properties?

Throwing more "regulators" at a market issue won't change a thing.

What we do know, however, is when you add regulations and make things more difficult, markets get distorted. The "energy debacle" which you speak of is a direct consequence of far too much government regulation - by greating hampering sources of domestic energy production, we are increasingly dependent on foreign countries to supply us.

Look at a chart of our % of energy that is imported over the past 30 years and how it has skyrocketed. It has been directly caused by government "solutions".

As for your "Hummer tax break", perhaps a lesson in tax accounting is in order as well. The American Jobs Creation Act of 2004 reduced the tax benefit on a large vehicle (even farm equipment) used for business from $100,000 to $25,000, and as you should know, even the cost of a hybrid used for business can be deducted.

Please show me how I, as an individual, can walk up to a Hummer store and get a tax credit for buying one.

But keep spreading those urban myths in your rants -- they make great soundbites!

[James Thorner]

I've got to agree with you, Chase. The immediate gratification philosophy dictates you have to own a 3-bedroom in your 20s, with a garage big enough to house the $35,000 sports car whose $600 payments you can't afford either. Ten percent down is a fine place to start (with certain exceptions for people with exceptional credit or exceptional incomes)

[Fuzzy Bear]

I think a lot of the blame lies at the feet of the "everyone deserves a home of their own" crowd.

The blame is spread across multiple groups right down to the end user. I agree with the 10% down, but for those with the income, it should be more along the lines of 20% down.

The 20% down would most certainly end the game of keeping up with the jones or j6pk.

[Steve Simon]

Just a quick response and then I'm gone:
The tax break I spoke of exists and it is significant:

"Congress reversed itself last fall with passage of the American Jobs Creation Act of 2004 and cinched back the SUV loophole from $100,000 to $25,000 while retaining both the 50-percent bonus deduction and the five-year depreciation schedule. The deduction is claimed as a Section 179 expense, meaning you must be in business, filing a Schedule C or corporate tax return, to claim it.

Will the lower expense ceiling stop the heavy-metal stampede? Not likely, says Ronnie Windham, a certified public accountant in Oxford, Miss.

"I don't think it's going to affect people's buying habits. Most people buying SUVs are paying $40,000 or $50,000, so by the time you take the 50 percent bonus deduction and the $25,000 depreciation expense, most of them are still going to write off the full amount."

One investigator for 16 counties has nothing to do with over regulation?
It does however produce a horrible lack of enforcment.

Boy some folks here are very angry, not me, I played golf today :)

[Jill Stewart]

I believe this is mainly a quick pre-election step, to "solve" the problem quickly. The government has to show, that risky behavior can be punished by the market! But with attitude "do whatever you want, tax payers will heal it" you can't avoid the same mistake again and again in the future. Of course, it's not only about the US. I am afraid most of the world's governments and businessmen are good friends...
Jill