Reader Reports: “U.S. Plans Takeover of Fannie and Freddie”

From “D.L.” via The New York Times. We went ahead and pulled some quotes. The entire article is definitely worth a read, and we hope to hear some discussion. On the streets we’ve already heard both the good and the bad, but what do you think?

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage-finance giants, that the government is preparing a plan to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.

-The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies’ new regulator. The executives were told that under the plan, they and their boards would be replaced, and their shareholders virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

-Under a conservatorship, most if not all of the remaining value of the common and preferred shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.

-Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the new legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

-In issuing their quarterly financial statements last month, the two companies reported huge losses and predicted that home prices would fall more than previously projected.

Nothing like a little bailout to get your weekend started.

U.S. Plans Takeover of Fannie and Freddie [The New York Times]

5 thoughts on “Reader Reports: “U.S. Plans Takeover of Fannie and Freddie”

  1. This is great for all the homeowners of America, and espcially in SF and sucks for renters like me. Mortgage rates go down, rents go up, and SF prices continue to hold up.

    Got to love bailouts! And the kicker is that the SF property market doesn’t even need one!

    I can see 40 year old renters all around SF groaning and starting up new blogs everywhere to counteract their frustration! :)

  2. 40yorenter,

    Your comments are so predictable that every time I see one, I wonder, “how will he come up with a new way to say the same thing?” Then, you pulll it off and I laugh my ass off! I love your rants even if nobody else does.

  3. 40yorenter, if you want rents (and by proxy, housing prices) to go down, you should be for the following:

    – The elimination of rent control. In a down market, landlords should want to drop rents to get a unit rented. Because of rent control however, it is in the landlords best interest to ask a high rent until someone comes along and can rent it. Even if it takes a year or more to find a tenant. Because all future income is explicitly tied to and limited by that rent. The elimination of rent control poses a few key problems, funding of affordable housing (the stated purpose of rent control), and tenant compensation for the loss of the less than market rate rent. A good way would be the progressive elimination of rent control, where tenants where bought out, and that buyout taxes, with the taxes going to affordable housing initiatives. If you did that in SF with the some 150,000 rent controlled units, it is entirely conceivable that $3B-$5B could be generated for affordable housing. Rental income is related to a supportable purchase price for the housing.

    – The construction of much more new housing. The more available supply there is, the lower rents will be. Look at the price of housing in the east bay since the downturn with all that vacant housing.

    – Policies which make the entitlement process for developers and builders easier and predictable. It shouldn’t take several years to entitle a project. There should be a final approval or rejection within at most a year.

    – The elimination of inclusionary and below market housing that is required without subsidy by the government agency requiring it. These requirements effectively become enormous taxes on new housing. In my building there are two BMR units that the developer was required to provide. They were paid for by the price of other units. In my case, I believe it added $20k to the price of my unit. I am okay with these requirements – but only if they are paid for by subsidy from a government agency. Otherwise you and I pay for them and they are simply hidden enormous taxes, taxes which become even larger considering they are often financed.

  4. Thanks Dede. All I know is that the US stock market is going to RIP higher in 5 hrs and 8 minutes by my watch.

    Bailouts for all! I can’t wait to see what all the doom and gloomer bloggers have to write tomorrow. So sorry. Gov’t will always bail us out!

    40YOR

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