One of the common phrases I have heard over the last couple of years is “how come Main Street doesn’t get a bailout?”
And I have usually just shrugged and said that no one had called me to ask my opinion but as soon as I heard of it happening, I would be sure to keep everyone posted.
I just now caught the first whiff that the federal government *may* be taking action to “bail out Main Street”.
Bailing out main street could take any number of different forms, but the most probable form in my opinion would be some kind of mechanism that deals with the problem of Negative Equity – or where people owe far more than their home is worth.
From Bloomberg:
Dec. 28 (Bloomberg) — The U.S. Treasury Department’s expansion of its capital backstops for Fannie Mae and Freddie Mac may foreshadow a shift in the government’s mortgage- modification tactics, Keefe, Bruyette & Woods analysts said.
The Treasury announced Dec. 24 that the two mortgage- finance companies, which were seized by the U.S. almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. The companies’ needs would be unlikely to exceed the prior limits “even in a stress case scenario,” Bose George and Jade Rahmani, the New York-based analysts, wrote in a report today.
“Given this outlook, we believe that the main driver of this significant change is the flexibility it gives the government to take more aggressive action to support the housing market, including potentially going down the road of allowing some form of principal writedown,” the analysts wrote.
Ok, so that doesn’t exactly mean that an announcement is imminent – but it is interesting to see what possible things may happen:
Shifting to principal forgiveness to cure so-called negative equity that makes borrowers more likely to abandon loans whose payments they can afford may prove more costly for Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, by sparking “another wave of delinquencies as people look at it as a rational choice” to default to seek the aid, George said in a telephone interview.
While you probably shouldn’t bet on some kind of formal principal reduction program coming out any time soon from Fannie Mae or Freddie Mac, if I have learned one thing in the last two years, it is this:
Anything is possible.
