Fannie and Freddie Have Been "Saved" -- Now What?

The former Goldman Sachs employees -- err, the government -- have decided to bail out Fannie and Freddie and the race to call another bottom in equity markets, not to mention housing, is on.

Reality, however, is not a friend of these hopeful bulls.

Let's take a quick scan of the economic landscape and see what issues the latest bailout has solved:

• The unemployment rate seems to only be going up, and unless the new federal agency charged with keeping tabs on the two mortgage giants is hiring en masse, there won't be much of a change here.
• The dollar could see its recent rally erased after our trading partners and investors around the world come to terms with the $200 billion the Treasury department just dumped into the blender to cut 50 bps off mortgage rates. And, take note, those are prime, Agency rates, and that's it.
• The unfortunate reality is that most Americans are still in debt and cannot afford a down payment on a house, a requirement that's yet to be removed.
• Gas prices have fallen, but not by as much as crude prices. Hurricane season is alive and well, threatening most of the gulf oil rigs. Oil companies are already under pressure from tumultuous markets for their black gold and are not likely inclined to lower prices further.

As painful as it is to admit, Fannie and Freddie probably needed to be bailed out to keep the entire financial market from collapsing but it doesn’t mean we are at “the bottom.”

It takes awhile for a fundamental shift in lending to play its way out and that is what we are in the middle of. The middle class is being squeezed more than ever and consumer credit quality on the whole is not going to start improving tomorrow.

More important than any of these points is we do not know what our friends at the government are going to do with Fannie and Fredie and how long it is going to take them to do it. In fact, trusting the very folks who ran these companies into the ground -- albeit under different leadership -- to turn them around is hardly a comforting proposition.

In the end, we need to remember that you need a good credit score and a down payment to buy a house in the real world. So no matter what a television analyst on TV who makes $500,000 a year tells you, this credit crisis is far from over.

A Housing Solution that Focuses on (Gasp!) Houses

This post first appeared on Minyanville and our sister site, Dawn Patrol.

Every once in a while, the most important news story of the day is the one the Wall Street Journal allots a mere 200 words.

In a move that will soon be greeted with quiet mutterings of “I should have seen this coming,” British Prime Minister Gordon Blair announced today a shift in the focus of initiatives aimed at reviving the ailing housing industry, and by extension the rest of the economy.

Until this point, much of the government-directed efforts to fix broken housing markets -- both here and abroad -- have focused on the mortgage side of housing transactions.

This should come as no surprise, as Wall Street banks like Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH) and Bear Stearns -- er, JPMorgan (JPM) -- had staked their reputations -- and balance sheets -- on those mortgages.

Foreclosure prevention has attempted to preserve the integrity of the loan by extending its ability to keep generating cash for the lender. If a family or 2 were helped in the process, all the better. But with trillions of dollars in securities propping up the world's financial system based on unreliable monthly payments from struggling American consumers, the mortgage was saved in favor of the property itself or its inhabitants.

HOPE NOW and Project Lifeline have been our bureaucrats’ best effort at leeping people from being kicked out of their homes. Anecdotally and by the numbers, the results have been less than awe-inspiring.

As part of a larger economic reform package, Brown is taking a decidedly different approach. Any homeowner behind on his mortgage and facing the risk of repossession will have his situation evaluated by a “money advisor,” who, according to the Guardian, will determine whether nor not the loan is worth salvaging.

If this guru of the economically unfeasible gives the thumbs-down, the borrower gets a rescue package; the government gets the house. A housing association or other publicly funded group can then lease the property back to for the former homeowner or otherwise rehab the property for new tenants.

The lender can either be made whole or can retain some of the risk (and therefore potential return) in the property, staying in the game a bit longer.

This focus on the raw asset -- the house -- rather than on a flimsy deed of trust represents a step in the right direction in the "war on foreclosures." The mere fact that Washington (and London) are dipping their tentacles this deep into housing markets should rightly disturb anyone with even half-hearted capitalistic ideals - but some government plans are better than others.

The problem with mortgage-focused foreclosure prevention is that it prolongs a borrower’s agony by keeping him in a loan he or she should never have taken out in the first place. The house itself bears the brunt of this strategy's shortcomings, since homeowners forgo maintenance, landscaping, trash removal and other value-preserving services to survive another month.

By stepping in and taking control of the property before the copper pipes can be ripped out and the repossession process can further erode the home's resale value, the plan could slow some of the economic hardship and community decay caused by abandoned, vandalized homes.

Although the business of buying and selling distressed mortgage assets -- including bank-owned homes -- is hacking its way through the world of troubled properties, the scale of the problem and the challenging nature of the transaction itself mean that the crisis will take years to work through.

If the government is going to use taxpayer dollars to try to get us out of this mess, land banks and direct funds for rebuilding communities isn't a terrible place to start.

It sure beats bailing out Wall Street.