The housing market was supported starting in 2008, when the Treasury Secretary Henry Paulson intervened with, amongst other things, a rescue package for Freddie Mac and Fannie Mae. This is fairly common knowledge.
What you may have forgotten is that the exact terms of the Treasury intervening amounted to a blank check on all losses incurred by the two institutions. Well, sort of…
The precise terms were that the Treasury would take on all losses incurred by the two institutions over cash flow for a period of 4 years. That bailout is set to end with 2012.
Which brings me to a quandary.
I don’t believe that these two institutions have been resolutely fixed yet; what is the likelihood that Fannie and Freddie can operate as independent organizations? More importantly, what happens if they require further government support?
In the 90’s, Fannie and Freddie accounted for over half of all new mortgages being generated. This irritated conservatives to no end, who you will recall launched an effort to reform the two institutions that was ultimately shot down by liberals who liked the social reforms they were bringing to the poor. Since they only suspected that the situation was unstable and would bring turmoil, the Republicans ultimately had to back down from their drive to reform the quasi-private entities.
Today, the situation is very different…
Now, Fannie and Freddie account for ALL new mortgages. We know that they are unstable and are losing money left and right. And Republicans are flat out pissed.
And here’s where the issue for me lies. You see, I own two multifamily REITs which have sort of, kind of admitted that they get all their financing needs either directly or indirectly through Fannie and Freddie. The consequences of a failure of either of these firms is unacceptable. The Real-Estate lobby is in high gear right now, pushing as hard as they can to save these institutions from conservative zealotry.
And I don’t know how this will end.
If the government support of Fannie and Freddie are set to end with 2012, then any future support would require a vote of Congress. When that vote hits the House, it’s a complete toss-up.
Part of me would like to believe that conservatives in the chamber will ultimately behave rationally. But right now, House conservatives, especially those that originated from the Tea Party, have so much egg on their face that I don’t know if they can see clearly.
Remember that these guys were voted in on a wave of anger and charged with one task: undo the (then) last 2 years. They set out to accomplish this goal from the most fortified of positions – all they needed to do was nothing and they would have had ultimate negotiating privilege. And in the end, with all of these advantages…they accomplished nothing.
They were tricked by their peers to surrender a 60/40 majority and concrete demands in exchange for a 50/50 split on a committee that ultimately dropped all of their recommendations. And they gave up veto ability by preapproving anything the committee came up with.
It was in that instant I realized these congressmen were nothing but Freshmen, with no chance of victory.
The problem was, I think so did they. When they realized how they’d been played like school children, they had to have been embarrassed.
And now, a year after the debt ceiling, I don’t think they’ll be as willing to negotiate. They’ve already been shafted once, left holding the bag looking like idiots. Will they fall for it twice? Our failures have a habit of hard lining us into unwavering positions. If Fannie and Freddie come up, I could see the House putting an elbow into the GSE’s throats, just to make a point.
In that outcome, I can say without hesitation, the entire housing market would relapse.
In my portfolio, CLP and AEC would crater. CLP, the better performing of the two, would be in bankruptcy inside of two years and financing dried up. Ironically, the weaker of the two names, right now, AEC, would probably emerge a victor (after the initial 50% losses) – the reason they’re hated so much is because they raised $100 million in cash (about 10% of their total assets). That’s enough money to keep the company running for 2 ½ years uninterrupted.
AEC’s CEO Jeff Friedman is such a shrewd SOB – I love it. I’d put money with him nine days out of ten. The guy didn’t just live through the Savings & Loan crisis; he was in charge during it. He remembers what it looks like when the US government wakes up one day and decides to sink an entire industry. He’s not going to get caught on the receiving end of that just because some punk 30-year-old analyst who was sitting in Trigonometry 15 years ago decides he thinks he knows how to run a business better than a veteran.
The guy has a mound of cash at his disposal, and judging how, after saying that money was for acquisitions and debt extermination, he hasn’t used a drop of it, I’m going to guess what they’re really afraid of is a credit shock.
So, as of right now, I would say that, rather than that silly cliff everyone’s talking about, this is the biggest issue in 2012. If Fannie and Freddie get sidelined by a hardline conservative coalition in the House, all stability in the housing market so far will be for nothing as it goes back into meltdown. And this time, the sole bright spot in real-estate, multifamily rentals and demand, will not escape the shock.
I’m putting my money that it doesn’t happen – it’s just too extreme. But the question comes down to this:
Do you think Republicans are concerned citizens trying to steer the course of government for the better? Or, do you think they’re out of their God-damned minds?
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