Another Fannie and Freddie Boondoggle

Foreclosures are a major problem plaguing the U.S. housing market at the moment.

More than 1.3 million housing units received a foreclosure filing in March, amounting to one out of every 662 U.S. homes. That’s 47% more foreclosures than there were last March, and up 7% from February. Economists are expecting the number to continue rising in the coming months.

Now, with hundreds of thousands of homeowners facing foreclosure, the government is attempting to stop the bleeding.

Government-owned enterprises Fannie Mae and Freddie Mac recently completed a study that found that principal reductions – or forgiving a portion of the mortgage principal homeowners on the brink of foreclosure owe – would save the agencies boatloads of money. Acting Federal Housing Finance Agency director Edward DeMarco estimates that such a measure would reduce Fannie’s and Freddie’s losses by about $1.7 billion.

It’s a proposal that has been gaining steam in Washington, as pressure from the White House and Democrats in Congress has forced Fannie and Freddie to become more aggressive in their foreclosure prevention. DeMarco, whose agency controls Fannie Mae and Freddie Mac, said last week that principal reduction would be “better for the enterprises” – a departure from his previous statements on the subject.

So there’s plenty of momentum behind the move. But the net effect of allowing homeowners on the brink of foreclosure to have large chunks of their outstanding principal forgiven would be catastrophic, in my opinion.

I would be against any bailout of homeowners, even if it means saving money for Fannie/Freddie.

To take government money from the Treasury to pay off home loans, and then have Fannie and Freddie make a "profit," essentially amounts to a shell game. I am generally opposed to all bailouts, and this situation is no exception.  

By bailing out homeowners, the government may mistakenly send the message to underwater homeowners to STOP making payments, because if they stop making payments, the government may bail them out. This is exactly the opposite behavior that we want to encourage.

As with all bailouts, the proposed principal reductions would tell people that it’s okay to make a poor financial decision or investment. It says, “If you do make a bad decision, don’t worry – the government will pick up the tab.”

While I feel terrible for homeowners who are under water, it is not the government's fault. More importantly, fellow taxpayers shouldn't be on the hook for a homeowner’s poor financial decision to buy an overpriced house.  

If the government bails out homeowners today, then what’s next? Bailing out people who can't afford their car payments? Lending a hand to people who took out student loans but can't find a job due to a poor economy? Where would it end?

I never advocated bailing out American companies after the economy went in the tank, and I certainly wouldn't support bailing out homeowners either – even if faulty government accounting shows that it "saves money."

Reducing homeowners’ principals to avoid foreclosure would lead our country down a slippery slope – and it would be tough for the government to put the brakes on once the bailout ball starts rolling downhill.

Published by Wyatt Investment Research at