What’s a Few Billion Amongst Friends?

There’s been a lot said and a lot written about the cost to save Freddie Mac and Fannie Mae. In the event these companies would falter, it would cost the government about $25.0 billion to bail the two mortgage lenders out and to keep them running. Both companies play a huge role in the issuance of residential mortgages in the U.S.

Considering Fannie Mae and Freddie Mac own or guarantee approximately half of the $12.0 trillion in residential mortgages outstanding in the United States, I consider the $25.0-billion bailout, if it is ever needed, well worth it.

The U.S. budget deficit for fiscal 2009 is expected to be just short of $500 billion dollars — a new record. The previous record was in 2004, when the budget deficit hit $413 billion.

So my question is: If the cost to bail out Freddie Mac and Freddie Mae is only five percent of the budget deficit, isn’t it worth it to shore up half of the outstanding U.S. residential mortgage market? Isn’t it worth it to bring stability back to the housing market? After all, didn’t the government bail out Bear Sterns? While some economists will be quick to lay blame on Freddie Mac and Freddie Mae for their loose lending practices, what happened in the past happened. We need to forge ahead.

The goal now is to bring stability to the economy, and “shoring up” the two largest U.S. residential mortgage lenders would just do that. The rebate checks issued by the government cost us a lot more than $25.0 billion.

Many of my readers will find it startling to note that Fannie Mae and Freddie Mac owned $6.9 billion worth of foreclosed homes at the end of the first quarter. Fannie Mae alone owned 43,167 foreclosed homes. And when it is selling these homes Fannie Mae is only getting an average of only 74% of the unpaid mortgage principal owed to it on the homes.

If worse comes to worst, the government will bail out both Freddie Mac and Fannie Mae. The cost of $25.0 billion, in my opinion, at only five percent of the budget deficit for next year, will be well worth it. As investors and homeowners, we should take comfort in these actions, as they signal a bottoming of the U.S. housing market.