I loved this quote from Lawrence Yun, chief economist of the National Association of Realtors, the trade association for American estate agents. Mr. Yun was commenting on the recent weak home sales activity in the US:
"The overly stringent lending criteria imposed by Fannie and Freddie in July (and August) in order to preserve their deteriorating capital situation contributed to weaker pending sales activity. Now that the federal government has taken over Fannie and Freddie with the explicit goal of providing more affordable mortgages over the next 12 to 18 months, we will see some return to normalcy in underwriting standards."
Remind me, why did the US government feel the need to bailout Freddie and Fannie in the first place? Yes, I remember, after years of lax lending standards, US foreclosures exploded, and the subsequent losses destroyed the capital base of these two massive institutions. So Mr. Yun and his estate agent mates now think that because the government controls these institutions, the same sorry cycle can start again.
However, could Mr. Yun be onto something here? Will the US government try to funnel taxpayers money into these failed companies and try to reflate the US market?
The temptation to misuse Freddie and Fannie will be irresistable. Right now, both the US Treasury and Federal Reserve need to put a floor under house prices. Now they have the tools to do the job.