fnm, fre takeovers and the stock market

right now, at this moment, many people know that something good is going to come from this government takeover of Fannie (FNM) and Freddie (FRE) , but they don't know how it relates to the market.

So, let me tell you how I see things unfolding. We know that our economy started rolling over because so much money -- trillions -- has been bet on house-price appreciation.

The wagering on American house-price appreciation has taken place in every venue and, in many cases, with gigantic leverage, magnifying a problem of historic proportions with a financial Armageddon quality we have not seen EVEN IN THE GREAT DEPRESSION. In other words, not since the Great Depression, but including the Great Depression. That's how important it was for houses to appreciate.

We are now in a double-digit decline of housing that has made most houses bought since 2005 worth less than their mortgages. House-price depreciation has been so relentless, particularly in Florida and California, believe it or not, two states that could bring the whole financial edifice down, that if it isn't stemmed then it's difficult to stop a severe recession, if not depression, given the abrupt slowdown of the rest of the world and our own skyrocketing unemployment.

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

So far we have failed so badly in doing so that borrowers of even the highest quality are now defaulting. That's wrecking the bonds and derivatives and the insurers of the bonds and derivatives and anyone that is holding mortgage paper.

The Treasury's takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.

The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.

Put simply, there will be no reason to foreclose, and no reason to walk away. That will DRAMATICALLY reduce the amount of foreclosed homes coming to the market. It will dramatically reduce the amount of money people owe on their mortgages.

Therefore, given the incredible 60% decline in homebuilding from two years ago, the incentives put in the recent housing legislation to buy a home and what should be a radical revision going forward in the amount of foreclosed homes, you can expect that house-price depreciation will be stopped within a year's time.

We have more homes for sale than any time since 1991, BUT we have 40 million more people than we had in this country in 1991, so that figure is virtually meaningless.

Given the low rates of interest in this country and what will now be mortgage rates that track those low rates, and given the freefall in home prices nationwide to where they were in many cases before the bubble, and in some cases well below, there is, for the first time, an INCENTIVE to buy a home.

That's how significant this takeover could be.

You need to forget its expense right now and the inflationary problems stemming from this. Those were the same reasons given when I suggested that we cut rates by 300 basis points last year and let everyone refinance when it was still worth it to do so.

I am tired of the moralizing based on a total lack of rigor and homework. We are at this extreme because our policymakers have simply been lazy, wrong, intransigent and foolish. If this were the private sector, all of these people would be candidates to be fired. If this were the NFL they would have been gone long ago. But because they are in high positions and considered somehow blessed with a ken far beyond reality, we are in this mess.

But the mess must be stemmed, and this will help stem it. Radically. It will not turn around the fortunes of the companies that need Europe or Asia to turn. Those economies just started slumping. It won't mean much to many industrial companies. At least not yet.

But it will revive credit and it will cordon the problems to where they are manageable, and we will no longer worry about the viability of a Wachovia (WB) or a Bank of America (BAC) or a Wells Fargo (WFC) or even a Washington Mutual (WM) because now any deposit is worth its weight in gold. That's because the spreads between what a bank can lend out and what it pays you are gigantic.

With bountiful credit and bank balance sheets cleaned up, we will get out of this moment, and we will be prepped to advance, just as the BKX, HGX and the retail index have been signaling. With mortgage paper turned into federal paper, the holders worldwide, from Russia to China to Europe, will be made whole. The world will rally and something good, at last, will occur. With the concomitant decline in energy, we have the start of a turn that could get us out of this bear market once and for all.

Considering that "the world' is not set up for this change, you can bet that those who are short or in cash have to say that all of this is much ado about nothing or that it won't matter a hill of beans. In fact, you will hear many things in the next 72 hours that contradict this bullish view.

That will be wrong. Do you hear me? Wrong.

I am tired of being laughed at for my July 15th call that the financials bottomed and my call for housing to bottom next year. I am weary of the catcalls and the attacks.

And, oh yeah, I am going to be right as of this weekend.

Maybe I just got lucky with this bailout, but it is better to be lucky than good.

As for the common stocks of Fannie and Freddie, owners, it serves your right. There has been another guy on this site, Doug Kass, who has told you again and again that their common stock is worthless.