Will the treasury bailout of Fannie and Freddie help the mortgage default and foreclosure problem in the next 6-12 months?


We asked our panel:

Will the treasury bailout of Fannie and Freddie help the mortgage default and foreclosure problem in the next 6-12 months?

Yes 5

The Kudlow Caucus Breakdown

Stefan AbramsManaging Partner, Bryden-Abrams Investment Management
No. By itself the Government takeovers of Fannie and Freddie will not halt the rise in mortgage delinquencies, defaults, and foreclosures over the next six to twelve months. However, to the extent that the explicit guaranty by the U.S. government of their borrowings enables the spread over Treasuries to tighten and since the Government will permit their balance sheets actually to expand through next year, mortgage rates and availability should improve, notwithstanding the weak capital positions of many banks. The result should be a gradual reduction in the inventory of unsold new, existing, and foreclosed homes. However, this action does little or nothing to resolve the many other problems facing the U.S. economy.

Joe Battipaglia
Market Strategist, Stifel Nicolaus
No, it will not. This plan is designed to preserve the liquidity of the new mortgage market to make good on the implicit guarantee of previously issued agency debt. While it does somewhat lower borrowing costs, it does nothing for stimulating housing demand or interrupt the decline in home prices.

Jared Bernstein
Senior Economist, Economic Policy Institute
I fear not. The deal should help the housing market in general, leading to more liquid mortgage mortgages, slightly lower rates, and more buying and selling activity. Maybe, if prices stabilize, some underwater folks come up for air. But beyond that, I doubt it’s a short-term game changer re defaults.

Jerry BowyerChief Economist, Benchmark Financial Network
But they will probably get credit for it anyway. The foreclosure problem has already peaked a couple of months ago and this is a great example of government defusing the bomb after it’s already gone off. The real impact of the current conservatorship is that it raises the stakes in the presidential election. Under McCain, the banks that are too big to fail will properly be made too small to worry about. Under Obama, they’ll be given everything they want tied up in a bow with a cherry on top. McCain and free market conservatives like Larry Kudlow and the Wall Street Journal and the American Enterprise Institute are vindicated by the failure of these government-sponsored entities. Does McCain have the sense and boldness to use this issue to his advantage? We’ll see.

Vince FarrellSoleil Securities Chief Investment Officer
No- the mortgage default/foreclosure problem comes from the poor credit standards, or no credit standards, of yesterday. What could make the situation worse would be a surge in unemployment that would impact consumers ability to make the mortgage payments. The Governments actions this weekend will encourage future mortgages to be made as the secondary market becomes more liquid, but, tragically, we'll have to go through whatever default cycle is baked in the cake.

Jim LaCampPortfolio Manager, Portfolio Focus, RBC Wealth Management
Co-Host, Opening Bell Radio Show, Biz Radio Network
It may help to a very small degree, in that it might lower mortgage rates and free up capital for new mortgages. New mortgages and for that matter refis aren't being issued to those that are in real trouble, though. Too many ARMS are due to re-set as well. Won't put a dent in inventories. It will help to a very small degree, but not enough to be a game changer.

Art LafferFmr. Reagan Economic Advisor
Chief Investment Officer, Laffer Investments
Yes, in the short run it will clearly help markets, but it will make for a very serious long-run problem. Over time it will prove to be the wrong move to have made.”

Donald L. Luskin Chief Investment Officer, Trend Macrolytics LLC
Yes, without question. Delinquency, default and foreclosure has been decelerating anyway, and I think it would have turned the corner over the next 12-months in any event. But the bailout will assure and accelerate that, by lowering the cost of mortgage financing, and making it easier for banks to get back into making more mortgage loans. There may be a high price to be paid, in that the takeover represents a massive expansion of government power in markets. But that's another story.

Steve MooreSr. Economics Writer, The Wall Street Journal Editorial Board
Yes, mortgage interest rates will fall and that will help increase housing demand and hold up.

James Pethokoukis
Sr. Writer, U.S. News & World Report (Money & Business)
What the bailout does is prevent a total shutdown of the American mortgage market. Will there be some stabilization in the mortgage bond market? I would think so. Might housing affordability increase? Again, I would think so. But that would be more than offset by an outright recession. And if the lesson the American public takes from this takeover is that we need more government interference in private markets, then this "cure" could lead to a different and more deadly disease.

Robert Reich
Former Labor Secretary
Professor of Public Policy, UC Berkeley
Yes, the bailout will reassure lenders to Fannie and Freddie, thereby lowering Fannie and Freddie's borrowing costs, and hence, mortgage rates.

Gary Shilling
A. Gary Shilling & Co. President
No. It will offset Fannie and Freddie losses with Treasurys, but won't bail out underwater mortgagors. That will come later as falling house prices wipe out homeowner equity and force a huge Washington bailout to preserve the American Dream of homeownership.