Housing saga: from rocket science to postal work?

By Burton Frierson - Analysis

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.