Today from CNBC:
Fannie and Freddie provide a vital role in the mortgage process by buying mortgages from lenders that don't want the loans on their books for the long term. With Fannie and Freddie struggling with capital and perception issues, they aren't buying as many loans and are thus crimping banks' ability to write mortgages, which in turn chills buying in the housing market.
"Unless we find a way to continue Fannie Mae and Freddie Mac in their current form we don't have a mortgage market," Howard Glaser, a mortgage industry consultant, said on CNBC.
The seemingly inevitable move by the federal government to rescue Fannie-Freddie initially would shake the market.
Common stock shareholders likely would get wiped out, while those holding subordinated bonds also likely would be hurt because recapitalization likely would come in the issuance of preferred shares.
But once the dust clears and Fannie and Freddie can get back to lending again, that would likely be a catalyst to send the market higher. Combine that with a possible takeover of Lehman Brothers, which also could hurt shareholders, there would be greater clarity on Wall Street.
"The scenario is the cross feelings of when are we going to get this behind us, versus once we do how much better will it be, versus how much more we still don't know," says Michael Kresh, president of M.D. Kresh Financial Services. "Those events would bring us much closer to a final washout. I still think as we go forward if these banks don't put everything on the table, everything that's ugly, we could have another six months to two years of this bleeding in the financials."
Let's see if I got this straight. Fannie Mae and Freddie Mac, two privatized Federal mortgage guarantee agencies similar to Canada's CMHC, need to be bailed out by the government. Their shareholders and bond holders should be stiffed. That way, Freddie and Fannie can quickly get back to buying the shitty mortgages that the banks want to give to deadbeats, thus maintaining the fiction of solvency and prosperity. And the US taxpayer will pick up the tab.
Anyone who doesn't see where this is going should lay off the sauce for a while.