Sustainable Land Development Today - January 2009 - (Page 19)

The “pro” of such an orderly wind down would be an organized process of deleveraging without suffering from a massive and severe system shock with the “con” being that although smaller, the GSE status still grants all kinds of federal advantages, hindering free market competition, and setting taxpayers up for another meltdown in the future. Those holding more progressive opinions argue that Congress should go the extra mile once the immediate crisis is over and fully privatize them1, stripping their GSE status and the accompanying legal restrictions on the diversity of their investments, so that they would be subject to unfettered market competition. Normal markets must allow faulty businesses to fail, as demanded by the tenants of capitalism. Clearly, that is not the case with these two hybrid public-private entities. Additionally, it is dangerous to maintain such a large role in any market for only two operators. Like any other private-sector corporation in financial peril, once these entities are privatized and stripped of their special privileges and federal loan guarantees, they should be forced to sell assets, raise capital, and reduce debt. Once they have been downsized and deleveraged, the market will determine their fate. The “pro” of immediate privatization would be the elimination of privileged and potentially toxic GSE mortgage companies with the “con” being a massive market adjustment that may wreak havoc on the mortgage market over the next few years. Considering the aforementioned “pros” and “cons”, the best solution may be a combination of the prior two suggestions. In other words, it may be most prudent to gradually reduce them to a more comfortable level and at that point, removing the GSE status and let the chips fall where they may. Regardless of whether Fannie and Freddie retain their GSE status, the commercial and residential real estate markets will face real challenges over the next several years due to the “perfect storm” which are now facing. We are currently witnessing unprecedented business failures and forced consolidations on Wall Street that are leaving investors around the world wondering what the next day will bring. Despite the doom and gloom, Americans are traditionally optimistic and determined, and understand that however bad things seem on Wall Street and “Main Street,” this storm will pass. Lack of available credit will dry up real estate development, which should allow demand to catch up to supply. Increased regulations coupled with tighter lending and underwriting standards will bring discipline to the market. Eventually, supply and demand fundamentals in the housing and commercial real estate markets will converge and the markets will recover, albeit slowly. Predicting the Future of Fannie and Freddie Based on Politics Since the election of Obama/Biden, it is likely, in our opinion that Fannie and Freddie will continue to receive special treatment under the GSE status. Despite the best efforts of Democrats in Congress over the last ten years to relax regulations for the two GSEs, this is no longer a political or economic reality. It is reasonable to expect that both Fannie and Freddie will be downsized over the next several years, to the point that they will no longer represent a systemic risk to the market place. They will face very strict regulation and will likely be redirected to address the original mission of Fannie and Freddie, which was to help low income families attain a mortgage. Fannie was originally created in 1938 to save the national housing market in the wake of the Great Depression and ironically, 70 years later, the national housing market of 2008 may have just killed the former savior. SLDT 1 There is a precedent. Sallie Mae, the student loan financing firm which was a GSE chartered as the Student Loan Marketing Association, has successfully gone through privatization — started in 1997 at its own request, including a financial mechanism through which the firm has compensated the public for the value of the taxpayer subsidy it inherited. About the author: Paul Silver joined Wall Street Resources in 2006 as its Managing Director of Research. He has been in the financial services industry since 1995 and can be reached at (772) 219-7525 or go to: www.wallstreetresources.net Circle 156 or www.SLDTonline.com/webcard www.SLDTonline.com 19 http://www.invisiblestructures.com http://www.wallstreetresources.net http://www.SLDTonline.com/webcard http://www.SLDTonline.com

Table of Contents Feed for the Digital Edition of Sustainable Land Development Today - January 2009

Sustainable Land Development Today - January 2009 Contents Our Voice Your Voice The BottomLine SLDI in Focus Calendar Industry Rebound Will Require Balanced Approach What Happened to Fannie and Freddie? Added Value in Entitlements Industry Spotlights Technology Wastewater Innovation Classifieds Advertiser Index Editorial Board SLDT Resources Last Word

Sustainable Land Development Today - January 2009

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