Meet the new slum lord – Fannie Mae

Posted by Jason | Posted in Economics, Government | Posted on 07-11-2009

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Fannie Mae announced a new “deed for lease” program, where they will take your deed and rent your house back to¬† you if you don’t qualify for a loan modification and can prove you can’t pay your mortgage. They will sign a one year lease with the current owners. They are hoping they can then sell off the houses a year from now, when they assume the housing market will be better and the value of the homes will be higher. This is some pretty optimistic thinking from a now government owned institution.

What would make them think the housing market is going to pick up that much over the next year. So far, unemployment continues to rise. The Fed has been busy at the printing press, and the government is taking debt levels into unknown waters. More than likely if the economy begins to pick backup, we are going to have massive inflation. That will lead to two scenarios. Either we’ll have hyperinflation that makes the 70s look like child’s play, or we’ll have a Fed induced recession to bring inflation under control. Neither scenario paints a pretty picture for a booming housing market.

Fannie Mae and Freddie Mac (Freddie is already doing something similar) are only delaying the inevitable. The market is much smarter than the government is. It will take into account that these government institutions have a ton of inventory being hidden from the market, what analyst call “shadow” inventory. If the housing market begins to pick up, it will be driven back down with this excess inventory. Instead, Fannie should take the short term pain and end it quick.

Because of Fannie’s mistakes it is asking the government (me and you) for another $15 billion after a quarterly loss of $18.9 billion. In total, it’s estimated that we will have wasted $200 billion on both Fannie and Freddie by the time this mess is over. Then again, we know how reliable government estimates are. So far we have handed over $61 billion to Fannie, and estimates are that Fannie is sitting on inventory around 65,000 homes.

Instead of becoming landlords, why doesn’t Fannie and Freddie sell of packages of houses as investment bundles. This would get the houses off their books, and it would bring them back into the free market where they can begin to stabilize the market. Investors will buy theses homes, and guess what they’ll have to do? They have to pay taxes on their profits, which ultimately will help with the government losses that will occur with the sale. With the investors holding properties, they will want to drive prices up. They’ll either rent them out, which investors are better at than the government, or they will fix up the homes and put them back on the market. Investors will not shoot themselves in the foot by flooding the market. They will slowly bring the houses onto the market to maximize sale prices and make the most profit. Whether renting or selling, the investor will be paying taxes on his capital gains.

The government should just take the short term pain of selling them off now? This may hurt the housing market, but it will be over and stabilization can begin. Instead, the government is prolonging this crisis and making it worse, and who’s going to eat this mess? We are.

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