The trouble with mortgage heavyweights

By Li Hong (chinadaily.com.cn)
Updated: 2008-09-11 10:44

The problem with Fannie Mae and Freddie Mac is that they are hybrid children of the administrative authority and private adventurism.

As an individual can hardly serve two bosses well, the two American housing mortgage giants, with explicit backing from the US government since their founding, have foundered lately.

The Bush administration has rushed to take control of them, in order to prevent any catastrophic spillovers that may eventually collapse Wall Street.

The two companies were intended to serve two bosses -– stock investors who put up capital and want bulging dividends, and a federal government which created the two in the first place to extend the house industry and build up home ownership.

Now, the investors' interests are squeezed because of the emergency federal seizure and rescue plan, and American home ownership is spiraling downwards, hurt by the ever-rising foreclosures across the United States.

One might mock China's short history of market involvement. But the past 30 years of reform and opening up experiences have verified, once and again, this kind of system can hardly be competitive in the marketplace, if not survive at all. The current state of its medicalcare system, in which both the public and the private are at stake, are very much at the center of citizens' wrath.

Pundits believe that it was during the long US housing boom period that the seeds of destruction were sowed for Fannie and Freddie. For years the two appeared to be very profitable, so the Congress and US governments mounted more pressures on them to finance housing for poor Americans, which, together with other reckless private lenders, created the subprime problem in the first place.

But then rays of light shone through as the major stock markets around the globe rallied on September 8 after the US government decided to bail out Fannie and Freddie. They were seriously ailing and could not stand on their own as the losses incurred from the sub-prime debacle keep mounting.

Under a deal brokered by the Congress and the Bush administration, the two companies will get up to $200 billion from the Department of Treasury, and immediately eliminate all their non-performing managerial executives.

Economists and investors the world over hope the momentum, ignited by the federal rescue plan, won't be short-lived. But, worries linger that other serious loopholes hidden in the world's largest economy remain unplugged, and may crop up one day and bring about an ultimate financial meltdown, which will be nightmarish for many, and not just for those in North America.

Doubts have begun to emerge over whether the government takeover of the two heavyweights, accounting for $5 trillion worth of US house mortgages, nearly half of the country's total, would resolve fundamental problems in the American credit and housing markets.

Currently, housing prices are continuously precarious across the board, from the United States to Britain to China, posing enormous mortgage and bad-loan problems for the lenders.

Chinese market watchers have had the jitters since the start of the American sub-prime crisis in 2006, as the country has a potentially perilous high-level exposure to the US debt market. Pundits estimate up to $900 billion out of its total $1.8 trillion foreign exchange reserve have been invested in US treasury bills and corporate bonds of Fannie, Freddie and the like.

The Bush administration's decision to guarantee the two mortgage groups' survival by a cash infusion was good news for world banks. Chinese banks have tens of billions of dollars invested in bonds that are insured by Freddie and Fannie, and they could have translated into huge losses if either company goes bankrupt.

And for sure, the faltering US economy will not recover until "the bulk of this housing correction is behind us", US secretary of Treasury Henry Paulson appealed to the public while announcing the rescue plan. He believes Fannie and Freddie are critical to turning the corner of the anemic American economy.

He was right. The US cannot afford to see the two go under.