CNNMoney reports that our government is about ready to put both Freddie Mac and Fannie Mae into a conservatorship. Apparently the markets were not taking the bait and had not been buying back into the stock of these psuedo-companies. What scared them off I suspect was the news a few weeks ago that the Secretary Paulson of the Treasury department was approved to do whatever was required to keep the Mortgage buyers/repackagers/insurers Freddie & Fannie afloat.
I believe this is a huge mistake. The report goes on to say that if Freddie and Fannie are not able to continue supplying low interest funding to the mortgage market, buying the mortgage loans, giving what amounts to government insurance (assurance), and repackaging those loans to feed them back to the market – banks will have to raise interest rates on mortgages and raise credit standards for borrowers!?! Isn’t that what banks should be doing? Making sure the borrowers deserve the loans they apply for and pricing those loans to properly represent the inherent risk? Isn’t this a return to what got us into this credit crisis in the first place? I think the terrible mess that Freddie and Fannie helped the industry generate needs to be completely unwound rather than restored to do more damage. Let Fannie and Freddie fend for themselves. Since the story that triggered this post is based on ‘media reports’ I hope that they turn out to be wrong and that when the real announcement is made next week that it ends up being good news. I won’t be holding my breath though.