Ultimate Bagholder: You and I

Well, we knew the taxpayers would be on the hook for some of this. What is clear from Paulson's statement is this is intended to be a stop-gap measure until Congress can decide what to do. Not very confidence inspiring, I know. Here's a quick rundown of how we're all going to pay:

• Preferred Stock Purchase Agreements - Treasury will buy newly created stock that guarantees the GSEs have a positive net worth. Common shares and current preferred shares will be subordinate to the Treasury's position.
  
• Secured Lending Facility - Treasury will loan the GSEs money to fund normal business operations if the capital markets fail to do so.
  
• "Temporary" MBS Purchase Program - Treasury will buy new mortgage-backed securities directly from Fannie and Freddie. The program will continue until December 2009, but the MBSs will be held until maturity (30 years).
  

The last part leaves a big unanswered question: How will this effect underwriting? As most of us know, the problems in the housing market resulted from poor lending decisions leading to underqualified borrowers taking on a debt load they could not service. No amount of new liquidity can make an overpriced house more affordable. Lockhart's statement paid lip service to the GSEs' "affordable housing mission," but the plan specifics make no mention of that role.

Clearly, GSE obligations are now explicitly backed by the U.S. taxpayer. What that means for new house loan issuance, remains to be seen.