The Answer To Foreclosure Problems May Be ‘Frannie’

A bold idea that has popped up is that the merger of Fannie Mae and Freddie Mac into Frannie may be the answer to foreclosure problems. With so many ideas floating around another outrageous one will make no difference.

The foreclosure crisis has been the prime cause for drying up the value of their shares. This has caused the introduction of this scheme in a tiny corner of Wall Street some weeks ago. Fannie and Freddie too have been playing ball with it.

Initially it was dismissed as too fantastic. But now that the taxpayers have got involved in this foreclosure imbroglio to bail out Fannie Mae and Freddie Mac no alternative is being summarily dismissed without a thought. One suggestion is injection of cash while another extreme idea is to break up the companies into many small firms so that one is never too big to fail. At the extreme end of the scale is this idea that by merging them they will be too big to fail. Size will be its strength.

The coming of existence of Frannie could not undo the foreclosure mess the companies have made. It will not be able to annul the billions of poisonous loans they either own or have backed. It will not answer the question as to whether in future the company should have the full backing of the government. Despite these negations the arguments for the merger are compelling.

The math is simple. The annual spending of $3.65 for overhead expenses will be halved while the workload will continue to be the same. It will of course lead to unavoidable lay offs of about a third of its work force and about $1.2 billion will be annually saved. Wall Street will immediately turn this amount with the touch of its magic wand to at least $18 billion. The market will again regain its confidence finding that Frannie is worth its weight in gold. All this will be done without taking a cent from the pocket of the ordinary taxpayer.

Fannie Mae and Freddie Mac are scheduled to spend $1.8 billion on ‘foreclosure costs’ – this meaning the maintaining and then selling off of thousands of reo houses and reo properties that fell into the hands of the lenders because of foreclosures. But Frannie being a merged entity would be able to slash to half these expenses also saving on $300 million per year.

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