Friday, July 11, 2008

Freddie, Fannie and Indy
I am trying to make sense of the collapse of IndyMac and the near collapse of Freddie Mac and Fannie Mae. This does not look good for the mortgage market. I don't see how the government can avoid saving Freddie and Fannie. I suspect it will be another long weekend on Wall Street and in Washington as capital is raised for Freddie and Fannie, and the Treasury and other regulators decide the extent of government's role.

The mortgage market, it seems to me, could get much worse than it is now. Housing prices have dropped and, I suspect, the mortgages causing problems for Fannie, Freddie and Indy are the most recent mortgages. With prices now at 2004 levels, the next wave of trouble will be the mortgages made earlier in the decade.

I would not be surprised by a national home saving plan to prevent a further meltdown of the housing market. Bill Gross (and I'm sure others) think the government needs to step in. Here is a blurb from his most recent newsletter, which was formed as an open letter to Obama with the assumption Obama is elected president:
In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law. By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride.
The newsletter assumes that congress will not act until January. The way things are moving, January may be too late for the economy.

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