MolloMarketReport

Saving Housing in the House

            The biggest financial news today came from Capital Hill rather than Wall Street which was something of a snoozer with the Dow and S+P increasing less than .5%.  A deal has been brokered between congress and the administration, likely by Treasury Department Paulson.  President Bush dropped his opposition (at Paulson’s insistence) to a measure to send $3.9B states to assist neighborhoods hard hit with foreclosures.  In exchange the House of Representatives agreed to Paulson’s plan to backstop Fannie Mae and Freddie Mac.  The Senate is expected to approve the bill tomorrow.  However, Republican Senator Jim DeMint has threatened to “slow” the bill unless Fannie and Freddie are barred from lobbying and making campaign contributions. This seems like an extremely reasonable addition to the bill considering the now explicit guarantee by the Federal government, Fannie and Freddie are exempt from paying taxes and that after the bill passes the new regulator of Fannie and Freddie will be in charge of pay packages for the firms’ executives.  However, considering the fear and political will pushing for a “solution” to the housing and credit crisis I fear DeMint’s measure will fail.  Another worry is that Secretary Paulson will have unlimited credit to use to hold up the lenders.  I could understand giving enough money to calm the markets, but “unlimited?”  That’s a bit much.  Even the President has to go to Congress from time to time to ask for more money for the war in Iraq, so why shouldn’t there be some type of limit on this bill.  Congress could then revisit the issue if it became necessary.  Checks?  Balances?

If passed, what affect will this bill have, on the housing market and the economy?  My guess is it would largely be positive.  With a backstop of Fannie and Freddie the mortgage market will be able to continue functioning until the banking industry is able to recover.  As I’ve stated before, eventually the foreclosures will slow back to their normal rate.  I’ve always felt that the Federal Reserve’s strategy is to prop up the banking system until it can get to this point.  This bill is a further tactic to bolster that strategy.  Furthermore, there is a psychological aspect to all markets, and right now the housing and credit markets are infected with fear.  This bill will help calm the markets for at least awhile.  Lastly, the “Democratic” portion of the bill to send money to neighborhoods that have been hard hit by foreclosures will help to take some supply off of the housing market which would aid its recovery.  I also think it is a well targeted use of money and dollar for dollar will be more helpful than the broad tool of lowering interest rates has been.

But there are some worries.  If DeMint’s amendment fails the long term opportunity for abuse will be very great.  If Fannie and Freddie are allowed to lobby politicians like normal companies, then you might as well have no regulator.  In fact the illusion of a regulator would probably be worse since the abuse of system will take longer and will likely go unnoticed until we are in another situation like we are now.  Perhaps Congress is not ending the housing crisis; they’re just delaying it by 10 or 15 years.  There is also the fear that the housing woes will be so large as to overwhelm the US Treasury or cause further weakness in the US dollar.  However, if the problems are that big I think there would be disaster whether the bill is passed or not.

Oil fell again today.  It dropped $3.98 to $124.44.  It seems that the severe uptrend in oil has been broken, and without the need to penalize “speculators,” although they had been threatened.  Perhaps if Congress can do a better job managing the countries finances and budget, it would help bolster the dollar which would also lower the price of oil, and in a more sustainable manner.

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