Like the Biblical Lazarus, miraculously risen from the dead, Fannie Mae and Freddie Mac, saved from total liquidation by the U.S. Government TARP program with a $187 billion taxpayer bequest, is not only alive and well, but more viable than ever.
As a reminder, both of these agencies were initiated by Franklin D. Roosevelt’s New Deal as a support mechanism to act as a mid-1930′s mortgage stimulant to revive an all-but-dead housing industry. Although both of these guarantors kept banks in the free-for-all housing game, they were also independent agencies with common and preferred stocks listed on the New York Stock Exchange stock markets.
This arrangement, which provided America’s commercial banks and other mortgage-providing financial institutions even today as a 100% guarantor against bank foreclosures, encouraged such mortgage providers with additional incentives to pursue the populist pressures, emanating during the Carter presidency. This put intense pressures on mortgage approval, even if loan officers realized that the income levels of those acquirers were poor bets for eventual repayment. Further pressure was put on mortgage providers to offer such mortgages with minimal “earned” money down, and even with double digit 30 year mortgage interest, which an increasing percentage of mortgagees were unlikely to fulfill.
This risk was buttressed by the increasing value of housing, as even poor risks could “flip” houses, making a profitable capital gain after holding a house for as little as five years, before moving into an even more expensive home. Such artificial stimulation created a gigantic bubble of excess homes, whose foreclosures flooded the market during the 2008-2010 “great financial implosion.”
With hundreds of thousands of bankruptcies flooding into the guarantors of last resort, both Fannie Mae and Freddie Mac were overwhelmed, with only the near $200 billion government bailout keeping them afloat. But with the post “great financial recession” aftermath and the literal wipeout of common and preferred stock, the U.S. Treasury, fully supported by the Obama Administration, chose to keep these “courts of last resort” alive, to prevent a total implosion of what was left of the housing industry.
With the majority of today’s new “housing” supported by leased and rental residential building developments, together with billions of foreign investments, the underpinning to make such a comeback has put the government mortgage agencies on solid footing. With the U.S. Treasury Department holding all but 20% of outstanding common and preferred stock, these have had an amazing comeback. Although no preferred dividends have been paid, those still holding Fannie Mae and Freddie Mac common have realized a solid return toward profitability, even if still a long way from “pre-disaster” levels.
There is no interest by the government to return the preferred dividend or reimburse previous stockholders, who took a “100% bath.” Those naive enough to believe they can sue the government are better off investing in the restructured mortgage agencies, now dependent on banks with much stricter loan requirements, and dealing with “developers” rather than individuals whose payments and monthly interest payments were always questionable. It is very doubtful that asset-based housing will be more than few and far between in the future, as the more solid builder-supported leased “residentials” provide most of residential housing underpinning.
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