Housing market socialism makes a colossal advance this week! The glass is half full to some, and half empty to others. For myself, I can't see how saving the (mostly) Chinese investors but wiping out the (mostly) American shareholders will be anything but a big, big negative:
NEW YORK -- The government's groundbreaking move Sunday to take control of Fannie Mae and Freddie Mac could give a much-needed boost to the housing market and the stock market as well.
But the development is bad news for anyone who owns stock -- common or preferred -- in the mortgage finance giants.
On the positive side, the federal intervention is likely to bolster confidence in the financial system in general and in the debt of Fannie and Freddie in particular.
That would help to lower mortgage interest rates, reducing costs for home buyers and making it easier to qualify for a home loan.
"This really can't hurt anything," said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md. "If anything, it's going to make it easier to get a mortgage."
The prospect that the rescue will help stabilize the country's financial infrastructure -- a good thing for the economy -- could send stock prices up today.
In Asian markets, shares soared early today in reaction to the Treasury Department's steps.
But the rescue won't come without pain, and it won't solve the vast array of problems weighing on the economy and housing markets.
The takeover is expected to slam the already-depressed stocks of the two companies and may rattle other financial companies with exposure to them, experts said.
"By rights, the stocks should go to zero" when they open today, said Christopher Whalen, a partner at Hawthorne-based research firm Institutional Risk Analytics.
Under the Treasury plan, the shares might eventually have some value. But it could take years to know for sure.
Likewise, the companies' preferred shares -- which paid hefty dividends and were viewed more as bonds than stocks -- could well end up worthless, depending on how much taxpayer money Fannie and Freddie require to stay solvent. The dividend payments will cease.
The common shares "will become penny stocks and the preferreds are not far behind them," said David Kotok, chief investment officer of money manager Cumberland Advisors in Vineland, N.J.
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