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If Freddie/Fannie Go Bankrupt, Home Loans Would Completely Halt

By: Steve Johnson

7/7/2008 - 59 Comments

Freddie Mac and Fannie Mae are the largest US mortgage lenders, with trillions of dollars in loans. 

These two powerful companies are also government sponsored, which means that ‘free market capitalism’ is not behind these giant lending machines. Over the past year their stock values have plunged as their assets have lost billions of dollars with the housing market meltdown.   

Now the government is trying to correct the housing market problems by changing the rules of how much money mortgage lenders need to have on hand to protect them against a decline in the housing market. The only problem is that the new rules could push Freddie Mac and Fannie Mae into bankruptcy. Their cash supply is already lower than the required amount with the current regulations and it is almost impossible for them to raise money in this market.

According to an article in to Washington Post today,  Shares of Fannie Mae, Freddie Mac Plummet

“Investors dumped shares of Fannie Mae and Freddie Mac yesterday based on worries that the two pillars of the housing market could be forced to raise $75 billion of capital, potentially confronting them with an overwhelming burden and crippling already struggling financial markets.”

“The Lehman Brothers report rattled investors who were already anxious about the outlook for the housing market in general and the two government-sponsored firms in particular.”

“Requiring Fannie Mae and Freddie Mac to come up with an additional $75 billion "would mean that our housing market would come to a complete halt, nobody would be able to buy a home, and it would be devastating for the general economy," Shapiro said. “

See the problem is that if the rules are changed, Fannie/Freddie would be forced out of business and the new regulations would require mortgage lenders to only lend to people that can afford to buy a house, with a job, good credit and a down payment. But the reality is that nobody (or very few) American’s can actually afford a house under those conditions. Therefore, nobody would be able to buy a home and nobody would give loans to the people that qualify because Fannie/Freddie would be bankrupt. It would be devastating for the economy.

Massive Government Bailout Inevitable

Unless the housing market miraculously turns around very soon, Fannie and Freddie are headed for bankruptcy.  But of course the government will not allow this to happen because it would be devastating for the economy.  The only solution is to bailout Fannie/Freddie by printing or borrowing money, to the tune of a trillion dollars. It’s too bad that there aren’t any competing companies that could fill the demand if Fannie/Freddie were to go bankrupt.

That’s how capitalism works. If your company goes bankrupt, your competitors gobble up your customers.  But in this case the government has intervened in capitalism by creating these government sponsored companies with the intention of providing a ‘safe’ lending solution to help more people become homeowners. This is a clear example of how government sponsored companies fail and how if capitalism would have been allowed to run its course, could have saved the nation one trillion dollars. Yet, congress is working to extend government regulation and control over the entire mortgage industry.  Go figure.

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