The US Treasury just announced a plan to place Fannie Mae and Freddie Mac into conservatorship – whatever that means. As explained in the Wall Street Journal the plan “provides as much as $200 billion of new capital plus new credit lines for the country’s main suppliers of funds for home loans … and puts the two companies under management control of their regulator, the Federal Housing Finance Agency, or FHFA.” As part of the plan they are replacing top management of the companies and suspending dividends on the common and preferred stocks. Presumably common stockholders are going to get wiped out. I sure hope this is the case as taxpayer dollars should not be used to benefit stockholders. Besides, I own Fannie Mae puts so I’m hoping the stock goes to zero. We’ll see what the market thinks tomorrow.
This action was absolutely necessary as the mortgage market is becoming paralyzed. However, there is one deeply disturbing aspect of this plan. The WSJ reports that “The Treasury also plans to buy an unspecified amount of mortgage-backed securities issued by Fannie and Freddie in an effort to bring down borrowing costs for home buyers.”
Whoa!!! What’s this? The government is going to further subsidize home purchases? It’s not the place of the government to lower home owenership costs. All this is going to do is slow down the housing market’s adjustment to rational prices. Home prices have at least another 10% to fall, and in the end help solve the housing affordability problem for millions of Americans the right way. Instead taxpayers are going to end up holding the bag on homeowners behaving badly.