Rob Dawg, on Calculated Risk, regarding the Fannie & Freddie bailout:

Rob Dawg writes:
"I'm confused as to several aspects. F&F don't carry much paper having sold most off to bond investors who are paid interest in exchange for having assumed that risk. The paper they do retain is backed by both assets and the stock capitialization. The stockholders are paid dividends in exchange for that portion of the risk they assume as well. After these two classes of participants take their loses I just don't see the taxpayer on the hook for very much at all. In fact, this looks like a great opportunity to streamline the workout process. With current prospects I bet the US govt could pick up the outstanding bonds for dimes on the dollar. With Uncle sugar as the note holder workouts can be a simple process of borrower, servicer and federal govt. no more issues of ultimate ownership."

I think Rob is on to something here.  Could the government finally do something that actually helps the real estate market?  The Frank-Dodd Bill that is awaiting approval suggests that mortgage holders reduce the loan amounts to 85% of current appraised value.  While that sounds great in the congressional halls, in reality it's a joke.  Between the loan servicers having no power and the mortgage holders dragging their feet to cut what would be 30-50% off the balance of loans in Southern California, I don't see much relief happening.

If the government had a way to control or impact the lowering of loan balances, they could get something done - probably a lot more than the Frank-Dodd bill would accomplish.  Can the government infuse capital into Fannie and Freddie and have it used to streamline the process of workouts, as Rob said? 

Instead of walking away, more homeowners would stay in their homes if they could lower their balance and get a new payment. 

It's not fair to Fannie and Freddie investors, and if taxpayers' money is spent, it'll also penalize those Americans who were more prudent and didn't get over-encumbered.  But the government - the Fed in particular - is going to keep throwing everything against the wall until something sticks.