You’ve seen the reports that Freddie Mac’s CFO was found dead at home this morning, an apparent suicide. One unstable newbie CFO doesn’t bother me too much, and the event isn’t causing much of a ripple in the bond markets this morning.
The interesting thing about Fannie Mae and Freddie Mac is that, quite below the radar, they’ve morphed into practically full-faith-and-credit debt issuers. The term sheet under which they were nationalized last September provided that they should divest about one-tenth of their portfolios each quarter, with proceeds to benefit the Treasury, putting them on a glide path to full dissolution in three years or so. Instead their role has only gotten bigger and more systemic.
It’s no exaggeration to say that most new issuance of mortgages in the US (including refis) goes through Fannie and Freddie. But these mortgages are ultimately being funded by people who think they’re buying Treasury paper with a slight yield kicker, not by people who actually want exposure to US mortgages. If the market were to find its own level without this implicit federal support, it would be shockingly lower than it is now.
This is bad for at least two reasons: first, it misallocates economic resources, by definition. We simply have no way to know what desirable and healthy things the economy would be doing with the resources being forcibly directed into keeping housing overpriced.
And second, how do we ever remove the Federal support? No Administration will ever be willing to find out just how low housing values can really go. US housing has been permanently socialized.
To my readers here at RedState: I apologize for my low blogging output in recent weeks. As many of you know, I’m a CEO, and sometimes business gets very busy. I’m happy to say that conditions have been getting noticeably better, at least in the markets I participate in. Once things settle down a bit, I’ll be blogging more again, here and elsewhere.