Look at some of the ramification of the take over.

1. The CEOs will be fired – Great… it should have happened a long time ago.
2. The boards will be replaced – same as above!
3. There will be restructuring of the balance sheets – not so good!

The devil is always in the details.

The restructuring will result in a new class of stock to be created that has precedence over current stock holders. This new senior preferred stock will earn 10% a year.

Fannie and Freddie will be required to make major cuts in their mortgage holdings. Over several years they will have to cut their portfolios by almost 70%.

Mortgage rates are currently in the 6% range – Fannie and Freddie will be forced to borrow at 10% – you do the math!

With Fannie and Freddie cutting their portfolios by more than two-thirds this means that conventional mortgage money will be choked at the source.

This leaves FHA as the sole survivor. Let’s face it with Fannie and Freddie cut to one-third of their original size they will become secondary players. Is HUD prepared for the role it is being thrust into. For years this agency has taken a back seat and is now at 3 times it’s former production levels. This change will put a substantially larger burden on HUD.

Let’s hope that HUD is up to the challenge.