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.

Morgan Stanley Latest Band-Aid Over Fannie, Freddie's Bullet Hole

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

It looks like all those short-sellers might have been on to something.

Freddie Mac (FRE), the beleaguered mortgage giant that was just weeks ago on the brink of collapse, released second quarter results this morning that were nothing short of abysmal. Along with the financial backing of you, me and all the other US taxpayers, the government-sponsored enterprise now has:

• $831 million loss or $1.63 per share, compared with net income of $729 million a year ago.
  
• Revenue fell 28% to $1.69 billion compared to last year.
  
• $2.5 billion in credit loss provisions and $1 billion in mortgage-related writedowns.
  
• Board approval to slash dividends from $0.25 per share to “$0.05 or less”.
  
• The intention to raise $5.5 billion or more in fresh capital.

Although the company currently meets capital requirements demanded by its regulator, the Office of Federal Housing Enterprise Oversight, it may fall below those levels if the housing and credit markets continue to deteriorate.

Last month, shares plunged on fears that Freddie and its larger cousin Fannie Mae (FNM) would crumble under the weight of mounting losses in their massive mortgage portfolios. The Treasury Department tried to shore up confidence by demanding Congressional approval to support the 2 companies, should the need arise.

Treasury announced this week it had hired Morgan Stanley (MS) to help sort out the mess and assess the two companies’ financial positions.

It takes a very active imagination to think a company capitalized with just $37 billion to support more than $2 trillion in U.S. mortgage debt is anything resembling stable.

Although Fannie and Freddie managed to avoid buying the worst of the subprime mortgages originated during the housing boom, many equally toxic Alt-A and other non-prime loans made it onto their balance sheets. Even marginally savvy originators were able to exploit their automated underwriting and risk systems, resulting in the loss of billions of dollars from questionable loans.

Fannie and Freddie are now paying for their transgressions - or rather, the American taxpayer is paying, since Congress gave Treasury Secretary Hank Paulson what amounts to a blank check to bail out the two failed companies.

The only questions left are: When will Fannie and Freddie collapse, and what form will they take thereafter?

Many advocate for privatization, splitting the firms into several publicly traded companies. Others, mindful of the Federal government’s tendency to privatize profits and socialize losses, expect outright nationalization.

One near-certainty, irrespective of the outcome of their current crisis, is that Fannie and Freddie's ability to keep mortgages rates artificially low will be greatly reduced. That doesn't bode well for anyone considering buying a house in the next 20 years.