No Easy Fix for Mortgages or Housing, Say Analysts
Despite some inane press reports by various sources suggesting the the Treasury's move to place both Fannie Mae (FNM) and Freddie Mac (FRE) into conservatorship had somehow shortened the timeline for housing's recovery, most analysts suggested Monday that the bailout's true effect on homeowners and mortgage markets won't be known for some time. The most immediate effects, other than a rally in the stock markets that many think won't have legs, were a drop in mortgage rates and some big losses for those holding common and preferred equity shares. HW covered the potential losses in a separate story Monday; mortgage rates fell roughly half a percent or more across the board on Monday, various sources said. Linda Lowell, frequent HW contributor and columnist at Market News International, said in her column Monday that "new management will abandon the risk-based pricing and tougher credit standards Fannie and Freddie adopted in response to weakening housing and credit performance." "A re-loosening of credit standards and pricing is bound to disappoint all those who believe authentic stabilization of housing, as well as the US financial system, cannot occur until the excess liquidity – and the financial behavioral excesses easy money engendered – are wrung out," she wrote. In other words, it's possible that the government bailout of both GSEs could actually make things worse. And that's a thought that the market has yet to really digest; it's possible that Monday's rally could turn on such realizations by investors going forward. Fourth time a charm? Most analysts we spoke with suggested that the move to take over Fannie and Freddie would do little to ultimately help housing or restart the non-agency mortgage market, and would also do equally little to stanch a credit market crisis that has ripped apart balance sheets for well over four quarters now, despite strong investor optimism on Monday. "This is the fourth attempt to revive the market and boost investor sentiment this year," said Merrill Lynch & Co. (MER) economist David Rosenberg, in a research note Monday. "Each time the stock market embarked on a rally averaging 6 weeks and seeing the S&P 500 advance 8% before sputtering and heading back to new lows." "If anything, the takeover of Fannie and Freddie is actually a testament to how broken the financial system is," said Rosenberg. Ulterior motives? Some of the most seasoned GSE analysts suggested to HW that other motives were at play behind the Republican-led bailout attempt, speculating that the GSEs were not in nearly the dire financial condition being painted in the press. One analyst, who asked not to be named in this story, told us that "clearly another set of factors were at work. They were smart today not to define any insolvency definitions and to keep everything on a large playing field. "On the other hand, cloaking the move in the public benefit raises compensation questions for preferred or common holders who may turn out to be unduly harmed if by a precipitous decision." That same analyst suggested that the bailout move merely set up much larger financial market issues that have yet to be addressed. "Taking over Fannie and Freddie tees up the next set of issues that have to be addressed," he said. "It’s not a sideshow, but in a month we’ll be talking about something else." Merrill's Rosenberg agreed. "From my lens, policymakers have continued to react to events because they’ve been unable to get ahead of them and there’s unfortunately an appearance that the government, every step of the way, has continually underestimated the magnitude of the stresses engendered by the credit bubble that peaked out a little more than a year ago," he said. In other words, dear HW readers: you ain't seen nothing yet. Patience is key here, but there is much more to the equation than simplistic press releases -- such as the one from the National Association of Realtors, which said that the government's intervention "will help restore confidence in the secondary mortgage market." Nothing could be further from the truth. HW will be sharing our unique and exclusive insights, as well as updates from market insiders, with our email subscribers. If you don't already subscribe to our daily email updates, click here. Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.