U.S. Treasury Nationalizes the Mortgage Market

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We just witnessed yet another weekend bailout for the financial markets. The government takeover of ailing mortgage behemoths Fannie Mae and Freddie Mac was no surprise (prior editorializing can be found here and here) and has been jumped all over by the mainstream press. So I'm not really going to get into the details, as anyone interested doubtless already knows them.

However, I thought that the official nationalization of the mortgage market at least deserved a mention here at the Nerd's Eye View.

Someone asked me how this would change the housing and mortgage markets. My initial thought is that it won't. This move was intended not to cause something to happen, but to prevent something from happening. That something was the imminent bankruptcy of the two entities that account for about 80 percent of U.S. mortgage issuance.

Such an outcome would have changed the game, to be sure, but now it's not going to happen. Mortgage rates may adjust downward a bit, but from a big picture standpoint, it will be business as usual. (That is, until the new government-owned entity starts writing down mortgage principal balances for defaulted borrowers and other fun unintended-consequence-inducing activities).

Business as usual, by the way, continues to be declining home prices. The difference is that now they won't plummet into the abyss as they would have had Fannie and Freddie gone under.

The payback is that the government, and by extension the taxpayer, is now on the hook for whatever losses Fannie and Freddie suffer. The Treasury Department tells us that they will not suffer any losses, but their forecasting track record has been horrendous both before and throughout the mortgage crisis (the latest example being less than two months ago when they told us that they wouldn't do what they did this weekend). The potential for loss is unclear, but to put a ballpark figure on it, one former Fed-head estimates that losses could be as high as $300 billion. And that's $300 billion that the government doesn't have.

So the housing market (and all markets, really), have just been bailed out big time -- but not without some future, undetermined, and potentially huge cost.

I know it seems like the U.S. government and our society in general can go into infinite amounts of debt without any apparent repercussions. But it will not always be so. As we saw with the housing and mortgage markets, looming problems can often go a long time without seeming to matter -- until, eventually, they turn out to have mattered very much after all.

-- RICH TOSCANO