The Federal takeover of Fannie and Freddie is a watershed moment that signals a change in how financial companies will operate in the future. It marks one of the last gasps of a out-of-control securitization system that led to loose credit standards and aritficially low mortgage rates. So, how will the takeover of the giant financial entities impact Americans on a day-to-day basis. Here's what I think:
1. Getting a mortgage will become harder. Initially, getting a mortgage will become easier as banks and other financial institutions loosen credit now that the government has taken over Fannie and Freddie. But it's clear that the government intends to significantly shrink both institutions over time, and this will diminsh their impact in the mortgage market. Without a quasi-governmental institution to buy bank-issued mortgages and repackage them, banks will have to keep loans on their balance sheets, creating sticter lending standards and higher rates.
2. Mortage rates will rise. See #1 above.
3. Deposit rates will rise. Banks will need your dollars to fuel their lending in the future. They won't be able to sell mortgages so easily and then reinvest the proceeds in even more loans.
Take 2 and 3 togther and you'll see that interest rates are going to eventually rise, as they have been doing for longer-term instruments. Massive amounts of capital have been destroyed and increased demand for the capital that remains means a higher cost. It's fundamental economics.
4. Your taxes will rise. Don't believe a candidate who tells you your taxes aren't going to rise. Between the war in Iraq, soaring Medicaid costs, rising Social Security costs, and now this bailout, the government will need more money. The national debt is over $9 trillion dollars and as we've come to learn, you can't keep borrowing, and borrowing, and borrowing.
Related Articles:
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Freddie Mac Posts Deep Loss, May Cut Dividend by Sam Cass - Nov 20, 2007
Freddie Mac Halves Dividend, Plans to Sell Preferred Stock by Tom Davis - Nov 28, 2007
Fannie and Freddie May be In Real Trouble according to ... by irvwalocos - Jul 07, 2008
Fannie and Freddie Problems Show Collapse of Old Finance Regime by Sam Cass - Jul 10, 2008.
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