The recent bailout of mortgage powerhouses Fannie Mae and Freddie Mac have many exchange traded fund (ETF) investors wondering if this could be the recovery the financial sector needed.

Although last week the financial sector was one of the ETF market leaders, betting on a bull market in the sector is premature, reports Michael Kahn for Barrons.

Even if the financial bottom has hit, the recovery time is a long way coming, so do not get caught up in headlines and media hype. Mortgage rates could fall a bit at first, but not enough to save the decline in prices just yet. Some late borrowers may get saved and end up with lower payments, and mortgage rules may be different, reports Ron Lieber for The New York Times.

Congress is weighing what the next step for the two will be: privatize, nationalize or nothing at all. Treasury Secretary Henry Paulson said the next few months should be a “time out.” He acknowledges that a decision on what to do before the end of the year, though, is unlikely, reports Julie Hirschfeld Davis for the Associated Press.

The bottom line is that nobody really knows what this bailout will mean. All that is certain is that taxpayers might be underwriting most of the cost of doing so. This unanticipated bailout has never been done before, so there is no way to tell the outcome. Here are some hypothetical scenarios of what could happen:

  • Nothing changes for fixed mortgages, but new mortgages and re-finances may get easier with stabilized rates at a quarter point less or so.
  • Fees will be re-examined for the mortgage affordability factor.
  • Home prices may lower as the job market has cooled, and the number of homes for sale grow. Rate stabilization can only help get more buyers into the market.
  • A more intense homeowner bailout may go into effect to help troubled home owners with adjustable rate mortgages.
  • Shareholders of Fannie and Freddie may not get wiped out completely, but the focus is not on the shareholders anymore, as Paulson says.

ETFs that are in the line of fire:

  • Financial Select Sector SPDR (XLF) down 21.8% year-to-date
  • KBW Regional Banks (KRE), down 2.4% year-to-date
  • PowerShares Financials Preferred (PGF), down 2.3% year-to-date

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.