By Mike Colpitts
The reality behind the Fannie Mae and Freddie Mac bailout will amount not only to the largest single economic cost in U.S. history on the home front, but it will mark a monumental struggle for Congress to clean up the worst political financial mess in history at a cost to tax payers that will easily topple $200-billion.
The government’s seizure of the nation’s two largest mortgage finance giants takes America down a new and unprecedented path into a fully government controlled mortgage system. The seizure was inevitable and its’ delay has cost millions of homeowners dearly.
In the end, it became a necessary evil to save the nation’s economy from failure.
The mortgage finance system became so embroiled in developing new mortgage products to provide everyone who wanted one a mortgage, that all Americans will now pay the price in higher taxes or at least higher mortgage rates in the future. The cost could also come in higher closing costs, if not higher interest rates eventually. The government saw no other choice other than socialized mortgage lending.
The bailout will easily top the U.S. Savings and Loan Fraud scandal, and appears as though it will slow the national economy for many years as Congress wrangles with proposals to come up with a plan to handle the mess. But at least the government’s actions appear to be able to keep the economy out of a full fledged economic melt down. For millions of Americans suffering from economic stress and foreclosures, it does little to assist with their present crisis.
Freddie and Fannie have been unique hybrids for years as Government Sponsored Enterprises. But with nearly 80% of all mortgages being written these days going to both entities to be secured they had become too big to fail as monolithic government monopolies.
Their supporters said the structure garnered money from private investors, many of whom reaped high profits from their investments during the real estate boom. But many unprotected investors on Wall Street are now paying a high price as the stock of both companies becomes nearly worthless.
Critics said lobbying efforts by big lenders with White House assistance and many key Congressional leaders developed a system that was doomed to fail as it privatized huge profits and socialized losses. The American public was clearly against any bailout as a Housing Predictor poll indicated early last year with 81% who responded against a bailout.
In the end it didn’t matter what the American public wanted, but rather what seemed it would tolerate. Criminal activities and loose lending brought the lending system to its knees and triggered the destruction of more than $8-trillion in investment market losses worldwide.
Will it produce a better system in the end? Unprecedented times call for unprecedented action. Had the White House not tried to settle financial markets with the takeover it became clear that Wall Street and other financial markets worldwide would continue on their roller-coaster ride until they would either self-destruct or become so weakened that the nation’s overall business environment would become hapless or fail to work.
The domino effect of the credit crunch has taken on worldwide repercussions, and the fallout will take years to overcome. In the end, it proved that free market theorists were wrong since the criminal element coupled with manipulation on Wall Street had grown so large that it nearly ruined the markets as 75% of all mortgages made in the last decade were made largely unregulated.
For years America garnered the strongest and most powerful mortgage finance system the world has ever know until one day on Wall Street a year ago this last month it failed to work. Whether a nationalized mortgage system will work any better is anyone’s guess. Given the success of government programs in the past it seems it will have little chance of success.