Signs at Fannie Mae, Freddie Mac buildings
Signs at Fannie Mae, Freddie Mac buildings - 
Listen To The Story


KAI RYSSDAL: It's not a stretch to say there's more we don't know now about what's going to happen in the mortgage finance market than we do know. Starting with the eventual pricetag Janet mentioned. To get another perspective we've called Karen Shaw Petrou at Federal Financial Analytics in Washington.

Karen, welcome to the program.

Karen Shaw Petrou: Hi. Thank you.

KAI RYSSDAL: What do you think the odds are of this not working out the way Secretary Paulson wants it to and of taxpayers getting stuck holding the bag?

Petrou: Well, the odds are not small. Nothing has worked so far. So I think we need to be cautious about this. Treasury is doing the best it can with a set of really crummy options. It didn't want to do this, now it has and I think we all need to hope that this works because it's hard to even contemplate what else would have to happen if this doesn't take hold in the market.

RYSSDAL: Go ahead and contemplate. What else might happen?

Petrou: The next step, if Fannie and Freddie can't make it through the conservatorship, I guess, would be a receivership. Treasury right now has set this up so that would never happen. and a receivership is like a bankruptcy. The shareholders are completely cut out and the debt goes onto the federal budget and it's essentially nationalized.

RYSSDAL: I suppose it's important to point out that, as of right now, there's no federal money in this thing yet. There's no federal money in Fannie or Freddie right now.

Petrou: No. There will be at least $2 billion -- a billion each in each of the GSE's very, very soon. And I would expect a fair amount to follow. What Treasury is hoping is that even if they put the $200 billion or more, that the underlying assets of Fannie and Freddie are worth enough so that the net cost of all of this to the federal government doesn't approximate the actual outlay. That's really the bet. And it's a high-risk bet because of the way the mortgage market is these days.

RYSSDAL: Speaking of that, help me understand how this fixes or at least goes some way toward making the housing market better?

Petrou: You have to think of the housing market as having two problems. One is liquidity. By promising all this assistance, including a new window, the Treasury has basically said, "Mortgage market, financial markets, don't worry. As much money as Fannie and Freddie need, we'll keep the taps open." And that's a big help. That should reduce the funding costs and also mortage costs. But there's another problem, and that's solvency. Because a lot of the mortages Fannie and Freddie hold are going to go to foreclosure or are already in foreclosure. And there's nothing Treasury can do to make that better. That's already happened. The new loans might be better, but we've got to work through all the old loans. And that's really the risk to taxpayers.

RYSSDAL: I wanted to ask a question about the mechanics of this. The government has stepped in. They're going to backstop Fannie and Freddie for the next year. But then they're going to start reducing their exposure in the mortage markets by about 10 percent a year. Is this the government finally getting out of the business of fostering home ownership in this country?

Petrou: I think that remains to be seen. The plan is to run the portfolio down, as you rightly say, starting in 2010. But I think in 2009 we're going to do something else. We're going to nationalize, privatize or restructure Fannie and Freddie so that the portfolio issue becomes a secondary one, after we know, much more profoundly, what are we going to do with them?

RYSSDAL: Is this bailout enough to get the credit crunch at least a little bit unstuck -- the larger financial problem?

Petrou: It should, and so far this morning is, moving money. And that's been the huge, huge problem. The cost of funds to Fannie and Freddie went down a lot this morning. If it stays down and, importantly, if Treasury does what it promised and the new GSE's cut their fees, cutting those out, as now will be done, should improve mortgage availability and affordability a lot. At least that's the plan.

RYSSDAL: Karen Shaw Petrou is the managing partner at Federal Financial Analytics in Washington. Karen, thanks a lot for your time.

Petrou: Thank you.

Follow Kai Ryssdal at @kairyssdal