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Are Freddie and Fannie Insolvent?
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Financial news outlet CNBC was reporting early Thursday that Freddie Mac and Fannie Mae, the two corporations around which much of housing recovery has been structured, may be technically insolvent.
The claim came from William Poole, former president of the St. Louis Federal Reserve, follows a stock market trading day in which Freddie and Fannie stock resumed the free-fall it had started earlier in the week when Lehman Brothers speculated that changes in accounting rules would require that the two government sponsored enterprises (GSEs) raise even more significant amounts of new capital than had been previously thought. In a market which was plummeting in all sectors, finishing the day down over 230 points, Freddie's shares were off 24 percent on the New York Stock Exchange, closing at $10.26 while Fannies' dropped 13 percent to $15.31.
Poole told Bloomberg News that Congress should recognize that the two are technically insolvent and the odds are that the U.S. may have to bail them out. Others disagreed, saying that there would have to be sudden losses of $40 billion between the two to trigger insolvency.
Meanwhile, the Wall Street Journal is reporting that the Bush administration has been holding talks for months about what to do should either of the two GSEs fail.
The paper says that the government doesn't expect the corporations to fail and no rescue plans are imminent. The talks are part of "normal contingency planning" that the Treasury Department and federal regulators regularly undertake, but that these talks have become more serious recently.
The viability of the two corporations is critical to policymakers because of their key role in the housing market. They own or guarantee about $5 trillion of mortgages which equates to about one-half of outstanding U.S. mortgage debt. The two are currently $1.5 trillion in debt.
While many analysts are saying that the two cannot be allowed to fail, any attempt on the part of the government to help at this point would set off some wild partisan fights on Capitol Hill. Republicans have long sought to put constraints on the GSEs saying that their presumed safety net - the federal government - gives them an unfair advantage in the mortgage market and Treasury Secretary Henry Paulson has, in the past, denied any government intention to guarantee Freddie or Fannie's debt.
However, the assumption that Uncle Sam will be ready to step in should things get bad enough has allowed the GSEs an advantage which allows them to borrow money at better rates. Even in the midst of the current mess the companies have been able to get credit at relatively low cost. On Wednesday Fannie Mae issued a series of two-year bonds that were priced only 0.74 percentage points higher than the yields on comparable Treasury bonds about double the usual disparity.
While it appears most likely that Freddie and Fannie will continue to raise capital from private investors, other options open to help them include a credit line from the Federal Reserve, a federal guarantee such as the administration insists won't happen, or an actual equity investment in the companies by the government.
According to the Journal, "Fannie and Freddie are trapped in a vicious cycle. The companies will have to raise capital through stock sales, and the multibillion-dollar amounts they have to raise could result in a massive dilution of shareholders' equity. In anticipation, investors have been dumping the shares, driving their prices sharply lower. And the devalued currency of Fannie and Freddie shares means they will have to sell even more shares."
Freddie's viability is of more concern than Fannie's. When the Office of Federal Housing Enterprise Oversight (OFHEO) which currently functions as regulator of the two companies stipulated that one criterion for reducing surplus capital requirements for the GSEs earlier this year was that the companies raise additional capital, Fannie raised $7.5 billion right away, while Freddie is still waiting to get registered with the U.S. Securities & Exchange Commission, and wants to resolve past accounting issues before it does. In May, Freddie said it planned to raise $5.5 billion through issuing a combination of common and preferred stock.
At the open on Thursday Fannie Mae's stock was down $2.88 to $12.33 and Freddie's fell another $1.60 to 8.67.
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Comments (5)
| I don't want to be pesimistic, but the financial disaster is bigger than all of us can imagine and it will continue to get worse in every sector of the economy. Big corporations have been looted. Remember Enron? how many people lost their jobs, their 401-K's and pensions.
We all know or should know that the Federal Reserve Bank is corporate owned and should be closed. Let's start there, demand that it be closed. The nation is paying extremely high interest to this enterprise to borrow money and the national debt is in the trillions.
The One World Government that President Bush, Sr. talked about when he was president is here now and they are dismantling the economy in this country and all around the world to bring about the biggest totalitarian regime the world has ever seen. The money is controlled by a handful of the elite - the international bankers.
Some say, a new change in the White House is coming and I'm going to vote for it. No matter what candidate you vote for, Obama or McCain, (both poor choices), they both pledge allegiance only to their controllers. Patriotism is not involved. Obama could not have said it better yesterday on TV, "if we win, we will change this country and we will change the world" I think this time he's telling the truth (think One World Government).
If I had to chose to vote for what's available, I would vote Independent for Nader or Barr.
I don't know if it's too late to do anything about changing the direction our country is going, but I would start by really inquiring and doing some research to find out what's really going on. If you look to the Media and the Press for knowledge, there is not too much going on there - mostly smoke screens and missinformation. Do some reading, start with "Masters of Deception" by J. Edgar Hoover, you can buy it used on the Internet. Once you have found out who are really responsible for this financial mess, spread the word, tell your family, friends, anybody you can. I know this may not be the place to say this, but it is time We the People, pray and repent as a Nation:
“If My people who are called by My name will humble themselves and pray and seek My face and turn from their wicked ways, then will I hear from heaven and will forgive their sin and heal their land.” — (II Chronicles 7:14)
Tell your family, friends, anybody, Hurry, the time is short.....
A concerned Citizen |
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| Above Posted By:
Elfie
| Thu, 10 Jul 2008 18:03:05 EST |
| You know, I worked at a start up company with a girl that had worked for Fannie Mae for a long time. She gave a lesson to a small group in the company on money movements in the Mortgage Industry. How Freddie and Fannie lend money to the banks and lenders and mortgage correspondants, then the money comes down to the people that buy homes with a mortgage, sometimes through a Mortgage Broker. Describing this very same scenario above, she said how these two big money houses were teetering on failure. It is interesting to read this story, especially when I worked for this start up company almost 8 years ago. Which is the same time she went over this possible scenario. Well before the current market conditions, she predicted a possible collapse in credit. I can not confirm or remember if she gave her notice or if she was laid off. |
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| Above Posted By:
Anonymous
| Thu, 10 Jul 2008 16:02:32 EST |
| Alan hit the nail on the head. Reputable appraisers have seen the current debachle coming for years and been able to do nothing to stop it because we simply do not have the lobbying power and influence of the lending/banking industry. My local lenders as well as the big names out thereWells Fargo and RELS for one, are professing to have cleaned up their act, but now go to rotating lists where they only employ the cheapest and fastest, which in our market includes appraisers with less than 3 years experience and very limited training if any real training. People who "trained" under folks with suspended licenses now own their own companies and truly have no oversight to their incompetence. Experienced appraisers are getting pushed out of the market and have to sit on the sidelines as we wait for the mortgage industry to have its next crash when these next borrowers default when they try to sell homes that had inflated appraisals and values when they purchased. |
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| Above Posted By:
Renee
| Thu, 10 Jul 2008 11:35:32 EST |
| The solution to the housing and foreclosure mess is that lenders and borrowers be forced by law to work out new loan agreements, terms, loan payment amounts based on borrowers ability to pay even if it is a very small amount, etc., or even if it takes the borrower 40-50 years to pay instead of 30 years. Both the borrower and lender should be responsible for the property in question instead of allowing lenders the upper hand to use judicial foreclosures and or borrowers be allowed to just walk away. The absence of such responsibility on both the lenders and borrowers part spells imminent diaster to the whole economic system and world economy, neighborhoods, jobs, etc. |
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| Above Posted By:
Grace
| Thu, 10 Jul 2008 09:47:20 EST |
| All I know is that I have not been able to get lenders appraisal work for the last 10 years. If lenders do not consider the person who values the collateral important, aren't they really saying that the collateral itself is unimportant?
I think current events show that the value of the collateral is important, a lesson you would think would not need to be re-learned every business cycle.
Would corrupted judges paid for by one party provide stability and trust in the justice system?
Appraisers are supposed to be the real estate equivalent of judges, smart, knowledgeable and independent.
The lenders still have not learned..it seems they will do anything rather than pay a locally competent appraiser a professional fee to provide collateral value services...I see lenders using national providers and purchasing AVM's, BPO's, appraisal reviews of BPO's, out of state appraisers reviews of appraisals in markets for which they have no local data and no geographical experience....
My work is not ABC easy, despite what all the parties to the process seem to believe...Appraisals require many choices be made that require experience, judgement and wisdom. As lenders race to reach the bottom in terms of quality, pay and ever more rapid turn-time requests, qualified appraisers are forced out of the business.
AMC's continue to gobble up the appraisal fees, providing convenience for the lender, but destroying the appraisers ability to earn a livable wage. I have 20 years of unblemished work in this field, but no one seems to know or care. Had lenders utilized quality appraisarls, their exposure to this financial crisis would be so much less....Quality appraisal work is truly "pearls before swine", not appreciated, not searched for but standing on the sidelines as the country spins into an incredible but completely avoidable financial meltdown.
I would laugh and enjoy the justice that reality and common sense are dealing out right now, but that doesn't put bread on my table.
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| Above Posted By:
Alan
| Thu, 10 Jul 2008 09:35:43 EST |
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