Fannie Mae and Freddie Mac: Happy Anniversary

(MoneyWatch)  One year ago, Fannie Mae and Freddie Mac were taken over by Uncle Sam and thrown into conservatorship - kind of like bankruptcy for big companies that are too big to fail, I suppose. The stocks of both companies still trade on the big board, although for nothing more than a few bucks.

Given the hundreds of billions in losses and Uncle Sam bailouts, it's hard to imagine why investors think there is any value at all in either company. It's completely unclear if Fannie Mae or Freddie Mac could survive as independent companies at the moment or have any long-term value (even if they managed to avoid being delisted).

But someone is going to have to decide soon what will happen with Fannie Mae and Freddie Mac and what the mortgage industry will look like once the housing market returns to something approaching normal.

Because what we have now is anything but normal:

• More than 90 percent of all loans are bought by either Fannie Mae, Freddie Mac, FHA, Ginnie Mae, or USDA (rural development loans). That means Uncle Sam is taking on virtually the entire risk of the housing market.
• FHA is on the verge of going underwater. More than 7 percent of its loans are going into default, which is about the same as Fannie Mae and Freddie Mac's loan default rate. FHA is required to keep 2 percent of its outstanding loans in reserves as a cash cushion, but with the increasing amount of loans and an increasing amount of defaults, its reserves could soon shink below the mandated amount. Today, the federal government said it wouldn't need to put more money into FHA even if its reserves fell below the prescribed limit.
• Uncle Sam has been buying mortgage backed securities at a fantastic rate - but that's supposed to end on December 31, 2009. There is some question in the industry whether anyone wants to buy securities based on American home loans without the full faith and credit of the U.S. government. Over in Iceland, they've had just about enough of these securities to choke.
• The $8,000 first-time home buyer tax credit is likely stealing some of next year's home sales. Home sales and home prices have been supported by Uncle Sam's cash donation to the housing market. But the thought that the $8,000 first time home buyer tax credit is about to end is starting to create some panic buying. (Don't worry, if you haven't agreed on a price for a home by September 30th, there's little chance you'll be able to schedule a closing by November 30, 2009, when the program ends.) But how many of these home buyers would be able to purchase a home without an $8,000 gift from Uncle Sam? And, should we really extend and expand the program to all home buyers, or perhaps to $15,000? Even for millionaires?

The housing bubble was built on a platform of easy credit that masks an even bigger problem: Americans aren't paid enough to live the "middle class lifestyle" that has always been the true American Dream. Work hard and you'll be able to afford your mortgage, a new car every few years, cable television, health care, and college tuition for your kids.

It isn't asking much. But you can't live the American Dream without fairly easy access to credit.

The Realtors, home builders, and mortgage lenders won't like this, but it's beginning to look like borrowers cannot afford to buy a home without a subsidy that taxpayers cannot afford to provide.

Happy Anniversary, Fannie and Freddie!

Read More:
How About a $15,000 Tax Credit for All Home Buyers, Even Millionaires?