Housing saga: from rocket science to postal work?

NEW YORK (Reuters) - After years of letting rocket scientists run the U.S. housing market, the government is now turning it over to the post office.

At least that's the view of some on Wall Street who question whether the U.S. Treasury's plan to take control of mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) will jump-start the stalled economy.

The bailout hinges on Treasury using the two government sponsored enterprises as a well of liquidity to support the housing market by buying up mortgages, but some analysts wonder whether state-run firms will have the vigor to pull this off.

"As my partner says, you now have the post office running the agencies," said Andrew Brenner, senior vice president of MF Global in New York.

"With no stock and questionable bonuses, we do not think the GSE players will necessarily add to their portfolio."

The U.S. housing market is currently in its worst slump since the Great Depression of the 1930s.

U.S. Treasury Secretary Henry Paulson made clear that the housing decline was the biggest risk to the struggling economy and "at the heart of the turmoil" that has plagued the financial system for more than a year.

ROCKET SCIENCE

In the early days of the crisis, officials said the troubles were the result of financial innovation that got ahead of itself.

During the boom years, the rocket scientists of the financial markets sliced and diced mortgages, selling them to investors far and wide in a variety of securities and derivatives.

Analysts viewed this process favorably as "spreading risk," but it later became to be seen as a form of financial contagion.

To some, it was the rocket scientists, despite their quantitative and analytical skills, who got the housing market in this mess in the first place.

"An awful lot of the people who were hired to do this rocket-science structuring and carving were quantitative but didn't know the housing and mortgage market industry," said Thomas Lawler, an economist and founder of Lawler Economic & Housing Consulting in Leesburg, Virginia.

In some ways the agencies may have been victims, caught in the housing downdraft created by the deflating bubble.

Now that the government has taken over the two largest sources of government finance, however, there is still uncertainty in how they will be run under the new regime.

Fannie Mae and Freddie Mac are publicly traded but serve a government mission to support the housing market. They were placed in a conservatorship that allows their stock to keep trading but puts common shareholders last in line in any claims.

The normal powers of the companies' directors and officers will be held by the conservator, their regulator, the Federal Housing Finance Agency, until the businesses are restored to "safe and solvent" financial health.

Analysts said this creates a conflict between the government's rationale for seizing the firms and the task it has given them over the next 15 months, which is to pump up the mortgage industry enough for the housing market to recover.

"I don't think you can easily tell how they are going to be managed," said Thomas Lawler, economist and founder of Lawler Economic & Housing Consulting in Leesburg, Virginia.

POST OFFICE

Beyond that, some economists doubt whether the government's good intentions can solve the housing problem, which is one of falling prices and burgeoning inventories of unsold homes.

Since their peak in 2006, house prices have fallen by nearly 20 percent. The slump has left many borrowers with more debt than their homes are now worth while banks have tightened credit for new buyers as the financial industry digests its over-indulgence in housing loans.

Even with Treasury and the agencies hoovering up mortgage backed securities, the mess will be slow to clear.

"Fannie Mae and Freddie Mac are not buying homes, they are buying mortgage backed securities," said Michael Cheah, vice president and portfolio manager at AIG SunAmerica Asset Management in Jersey City, New Jersey.

"Although the bank can transform the bank loan into a securitized assets, and there is a willing buyer on the other side, the banks are not willing to create the loan because the banks have way too much of this junk at the moment."

Still, government involvement might not be a bad thing and the "post office" might prove more reliable than the rocket scientists.

After all, it was Nobel Prize winning economists who brought us the hedge fund Long-Term Capital Management, whose failure 10 years ago caused a major financial market crisis of its own. On the other hand, the post office delivers mail reliably everyday.

"In that case, I agree, it should be a post office," said Cheah."

He added: "Rocket science is full of it."

(Reporting by Burton Frierson)