November 11, 2008
Expand homeownership or achieve returns for the shareholders? That was the balancing act that ultimately toppled government housing firms Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) . The order of priority is now clear: The companies’ new conservator has announced measures to alleviate the terms of existing mortgages in order to avoid home foreclosures.
What of the taxpayer-shareholders?
The trouble is, those measures could end up costing the new shareholders -- and under the new financial order, that’s the U.S. taxpayer.
The bright side is that taking steps to avoid foreclosure can be a rational economic course of action, if private-sector banks (is there any such thing anymore?) are any example. Homes that are in foreclosure lose value more quickly than those that remain inhabited, for example.
JPMorgan Chase (NYSE: JPM ) , Bank of America (NYSE: BAC ) , and Citigroup (NYSE: C ) have already announced programs to reduce the number of foreclosures. Expect the remaining large lenders, such as Wells Fargo (NYSE: WFC ) , to follow suit (Wachovia (NYSE: WB ) had already initiated a program before being acquired by Wells) -- the government will “encourage” them to take that path.
Things aren’t getting simpler for bank investors
A financial crisis typically creates superb investing opportunities among financial stocks. However, a fluid regulatory environment and the extent of government intervention require that investors be extra cautious when navigating waters that have become increasingly murky.