Bailout Blather

In a prior thread, DA (Danny Ainge?) asked me to envision the financial landscape with no government taxpayer bailout of Fannie and Freddie Mac bondholders.

Well, quite simply, Agency bondholders need to take a haircut (10-20%) on their interest payments. In other words, the people who bought Fannie and Freddie bonds will have to agree to a lower rate of return than they signed up for. I believe they could refuse and push the agencies into bankruptcy, but then they would just be stuck with the *assets* of Fannie and Freddie. And, obviously, the underlying assets aren't performing as well as advertised.

Most of the people that own Agency bonds are wealthy individuals, hedgefunds, financial institutions, and foreign governments. These people lose money all the time on investments where no one *bails them out* and they have survived.

The mortgage market predates Fannie and Freddie by quite some time; AND it will live on well past their demise. This *bailout* won't do diddly for the housing market as the now explicitly-sponsored entity(s) in all likelihood won't be allowed to expand their balance sheets. Sure the big banks will dress up some of the toxic loans on their books and try to dump them onto taxpayers (through this new entity), BUT, for the most part, all the government will be doing is keeping wealthy bondholders whole.

I, for one, wouldn't be surprised to see the "private mortgage market" start to grow. This is where private individuals write mortgages most usually to people they have vetted or know (family). I think private mortgages may gain steam not only because the banks are reeling in their credit exposure, but also because CDs are paying such paltry yields.

If you had excess cash, would you want to put it all in 3% CDs spread around at different banks OR would you maybe be comfortable lending say 300k at 6-7% to a young professional couple so they can buy a house down the street whose value you think you have a good handle on?

No matter what the government does or tries to do, house prices are going to fall 20-30% to get back in line with median incomes. It'll be at least 20 years before Morons bid them back up to the insane levels of 2005-2006.



Don't buy the government's fear-mongering lines about staving off *systematic collapse* or about Fannie's failure setting off an *economic spiral*. If you chronically believe the rhetoric of politicians (healthcare "crisis", obesity "crisis", WMDs, Bear Stearns "must be saved", illegals "doing jobs Americans won't do", global warming "crisis", etc.) then I can't help you.

The fact is, nobody has any clear idea of what will happen in the future. AND, the last people I am going to look for guidance are the politicians who created the fiasco in the first place.

Probably the only way Big Government could help prop up housing prices in the slightest would be by raising household incomes. That would require massive tax cuts. Certainly don't bet on that!