Fannie, Freddie: "Keep the House!"

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.

More Foolishness:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

Alex Dumortier, CFA, has a beneficial interest in Wells Fargo but not in any of the other companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor selections. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 12, 2008, at 2:20 AM, rdotson310 wrote:

    I think all the talk of FNM and FRE have been greatly over-blowen by the government and media has been adding to the flames. As investors and main street grabel with a real crises we only hear pieces of a story that is seperated my a short time and then another piece comes and the old stuff is not brought back up.

    I am by no means an exspert on any of this but some of the most simple questions have not been answered in more strangly have not been asked by the mass media, (that I am aware of, but I have been looking) I do think we are not getting the whole story, I do think we are getting true statements that lead us in a direction that we ask the wrong questions.

    Foreclosers are up over the last three years but that is after years of the best years ever recorded historically they where still low but after hearing about it and the way it was reported brought it to reality. It is difficult for me to believe that three percent of the defaults on home mortgages brought the US to its knees and then dragged the world into a crises never seen before.

    I have lost most of everything I have saved my whole life in a matter of six months, addmittingly my fault the faster it fell the faster I put money in.

    FNM and FRE where some of my largest holdings. Less than a year ago the government asked the companies to buy the bad loans from the banks then a couple of months ago they take control of the companies to "help bail them out". It is true that between the two they hold over 58% of the home mortgages but being asked to buy the bad bank loans and still continue to buy the bad loans, currently they still own less than 20% of the bad loans wich is not bad when you realize that 80% of all the bad loans are held by the banks that are the main benifactors of the 700 billion even as they sell there bad loans to FNM and FRE the percentages would be greater if the two companies did not have to buy the bad loans from the banks.

    The government and tax payers bennifited greatly at the exspence of the shareholders that then held the shares taking 80% of the companies at no cost. Unfortunantly as they still are having to buy the bad loans from the banks who gave the bad loans and who most bennifit from the bailout, if they are continuealy asked to buy every bad loan a bank gives but the banks keep every good loan even the tax payer will pay

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