Hold it a little while
I think I see my friends coming
Riding many a mile
In the old days, friends and relatives were allowed to pay
the debts of others to keep them from the gallows pole, but today
we must all pay for our own sins. Such could be the fate of Fannie
Geeks like me not only enjoy reading esoteric market reports on a
daily basis, but we have e-mail alerts set up in attempt to be
first to get at the goods. Imagine my excitement at the headline,
"Moody's expects government to replace Fannie/Freddie."
Regular readers of this column recognize this as my recommendation
for a first step toward recovery. Not that the government should
necessarily replace the twins, but that something
be decided long-term. So, please indulge me on this topic which has
had so little coverage in the crisis-to-date.
As federally chartered entities, it is up to Congress to determine
the fate of the twins. At the very least, a major overhaul is in
order. Clearly, the brand names are tarnished forever and the
business model - attempting to serve both public and private
masters at the same time - needs to be put out to pasture.
However, private investors have almost completely abandoned the
mortgage market and it would not be good to allow this sector to
come to a complete halt. Today, the twins are filling a role
normally provided by these absent private investors by broadening
their approval base and increasing their loan limits.
By design, this is a temporary solution, but as long as the
ultimate fate of the twins remains uncertain private investors will
Why attempt to compete directly with the
It should be noted that even as Moody's predicted the demise of
Fannie and Freddie, they also reaffirmed their confidence in the
associated debt outstanding, stating in part that government
support programs "will provide (Fannie and Freddie) with sufficient
capital, liquidity and funding."
So, what of the government's new Fannie/Freddie? It's doubtful
anyone has solid insight here, as Congress has yet to even take up
the debate. The decisions to be made are complex because nothing
less will occur than a complete reconstitution of housing support,
leading to a complete restructuring of the mortgage market as a
Some of the difficult questions Congress must answer include:
- Who should receive housing assistance?
- What type of assistance should be provided?
- Will the new entity be publicly traded? (Let's hope not!)
- Should the new entity be profit-oriented? (Can we "double" hope
The complexity of these and the many other questions to be answered
creates the need for long and deep debate, putting off such
important decisions for some time (Moody's says 18 months). Because
the government touches about half the mortgages in existence today,
look for the housing market to remain in flux at least until this
new debate is put to bed. Key Developments
Auto sales got a boost in July from the so-called Cash for Clunkers
program, as domestic auto sales rose 18.6 percent to an 8.4 million
annual pace while overall auto sales increased 16 percent to an
11.3 million annual pace. Even these levels remain below widely
accepted estimates that 12 million vehicles are scrapped each
(normal) year, leaving much room for improvement in this
Construction spending rose unexpectedly in June by 0.3 percent
versus market estimates for a decline of 0.5 percent. While this
indicator is quite volatile and therefore difficult to forecast,
the downtrodden construction industry is looking for any positive
news. Spending is still down over 10 percent from a year ago when
we were already some six months into the current recession.
Nonfarm payrolls declined 247,000 in July, markedly better than
expectations, while the unemployment rate actually declined to 9.4
percent. For the first time, nonfarm payrolls declined less than
the worst month in the 2000/2001 recession. Either the job market
is getting "better" or employers are running out of people to let