Delisting of Fannie and Freddie – Irredeemable with an Exclamation Point!

On June 16, 2010 the Federal Housing Finance Agency ordered Fannie Mae and Freddie Mac to delist their shares from the New York Stock Exchange. The reason was that shares for both had traded at less than $1.00 per share for more than 30 days.

Because Fannie and Freddie no longer represent value to shareholders,some call for the nationalization of these entities, returning them to the status of government agencies. An estimated $1 trillion will be required to continue operations of Fannie and Freddie. The tax payer would shoulder all of the risk.

Others call for privatization, though finding willing private investors would be a challenge, gradual winding down of the companies – allowing bankruptcy to take its course, or the substantial diminishing of their presence in the mortgage market, where they had 75% of the market last year.  This is facilitated by the fact that the shareholders hold little sway.

1. Continuing Fannie and Freddie, without change and without placing the risk on the taxpayer is virtually impossible, given government’s track record.

2. Without Fannie and Freddie, we face a mortgage market without liquidity, leaving banks to bear the both credit and interest rate risk. Since the bubble burst, this has meant that mortgage lending from banks has been nearly frozen. Solutions for securitization of loans have a good chance of solving this dilemma.

Door number two looks like the more reasonable choice.