Housing Doom

Every now and then I read something that makes me think, "Yep.  Here’s the problem."  Check out this question from a Q&A from yesterday’s Realty Times:

Question: I have a mortgage on my home. I recently put a pool in my home with a pool mortgage. I cannot pay for the pool. What can they do to my home?

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It was hoped by many that the testimony given before Congress yesterday would give us a clue about the government’s "implicit guarantee of Fannie Mae and Freddie Mac".  Just how good that guarantee is, is a question that cannot wait too much longer to be answered:

Gerald O’Driscoll, a fellow at the libertarian Cato Institute in Washington and a former Fed vice president, says that "sooner rather than later" the government will have to explicitly guarantee the companies’ debt to restore confidence in Fannie and Freddie. If the firms were to collapse, it would likely wreck the U.S. mortgage industry.

Testimony by Treasury Secretary Henry Paulson sounded as if Fannie and Freddie might be on their own:

"It is clear that some institutions, if they fail, can have a systemic impact." However, financial players need to be disciplined in managing risk and not expect the government to fly to their rescue, he added.

"For market discipline to effectively constrain risk, financial institutions must be allowed to fail," he said.

However, Paulson also had this to say:

The companies “are playing a very important and vital role right now,” Paulson said in testimony to the House Financial Services Committee. They “need to continue to play an important role in the future,” he said.

So perhaps Paulson means SOME financial institutions, but not necessarily Fannie And Freddie. Other testimony however, made clear that congressmen are lining up behind the GSEs:

“They must not fail,” McCain said today during a campaign stop in Belleville, Michigan. Fannie Mae and Freddie Mac “are vital to Americans’ ability to own their own homes,” he said

And from the other side of the aisle:

“Markets should be assured that the federal government will stand by Fannie Mae and Freddie Mac,” Schumer said in a statement today. They “are too important to go under,” and Congress “will act quickly” if necessary, he said.

The question is then, just how committed is Congress to "standing by" Fannie and Freddie?  The GSEs are not easy organizations to stand by, and it’s unclear what the government can do:

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