Fannie and Freddie
This week, Fannie Mae and Freddie Mac have been generating scary headlines. There has been speculation the agencies, which basically buy loans from banks to keep mortgage money flowing to borrowers, may require a government bailout. Yesterday, Fannie Mae’s stock fell 14 percent, to $13.20 -- its lowest price in three decades. While Freddie Mac fell 22 percent to $8. And several politicians, including presidential candidate John McCain, have weighed in saying the government couldn’t let anything happen to Fannie and Freddie.
In a story in today's Washington Post, one analyst essentially says that talk of this nature can affect people’s mind-set and basically turn into a reality.
What do other people think? Is too much being made of Fannie and Freddie’s financial situations? Or are the agencies' executives and the country’s policymakers not acting fasting enough to head off a potentially big problem? Furthermore, should this subject be getting more attention in the presidential race?
Here’s the top of the Washington Post story:
WASHINGTON -- Shares of Fannie Mae and Freddie Mac, two pillars of the nation's housing market, continued to plummet Thursday as investors and federal officials contemplated the possibility that the giants of the mortgage business could require a federal bailout.
On Capitol Hill, the Treasury secretary offered reassurance that they are still on firm footing, and the Senate approved a housing relief bill that would give a regulator more power over them. On the campaign trail, the presumptive Republican presidential nominee vowed to do whatever is necessary to keep the companies functioning. In the financial world, some people had concluded that a painfully expensive rescue was inevitable, while others said it was unlikely. The speculation was taking on a life of its own, feeding a downward spiral.
Analyst Howard Shapiro of the investment research firm Fox-Pitt Kelton wrote that the prospect of the Washington-area companies becoming insolvent was remote, but he added, "(W)e cannot account for the psychological impacts of this kind of talk, which can create its own reality."
On one point there seemed to be general consensus: The failure of Fannie Mae or Freddie Mac could be devastating, making it harder for people to buy and sell homes and sending ripple effects through the broader economy.
The meltdown of the mortgage business has left Fannie Mae and Freddie Mac the main sources of funding for mortgage lenders. The companies, which were chartered by the federal government to keep those funds flowing, pool mortgages into securities for sale to investors, guaranteeing that they will cover the payments if borrowers default. They also buy and hold mortgage investments.
Although the companies and the federal government deny it, the financial markets have long assumed that the government would step in to cover the companies' trillions of dollars of obligations if they were unable to do so themselves. The belief that the government stands behind them helps explain why Fannie Mae and Freddie Mac have historically been able to borrow money at low rates -- and why the demand for their mortgage securities did not dry up as investors abandoned other mortgage-related investments.
It's a classic example of a run on the bank. Where is George Baily when we need him?
In addition to the obvious challenges posed by Fannie and Freddie, it's worth noting that their troubles have also wrecked Obama's housing policy, something that he has yet to acknowledge.
Obama is fond of touting his Affordable Housing Trust Fund, even though the scope of the program is a little unclear. A year ago, he said it would create as many as 112,000 new units. He later spoke about building up to 14,000 units each year – either a downward revision, or the original number spread over two terms. More recently, the campaign has shifted to the vaguer goal of thousands of new units. But it's the linchpin of his housing policy, and his only proposal for actually expanding the number of affordable units in America (nevermind that it wouldn't even keep up with natural population group among those who qualify for public housing, let alone expand the supply).
The trouble is that he says he'll fund it with “a small percentage of the profits” from Fannie Mae and Freddie Mac. Oops. Not only have they not be profitable for several quarters, it now seems that their obscenely large profits (and consequently obscenely lucrative payouts to executives and appreciation in share price) have been entirely illusory - that is, their business model hasn't been profitable at all over the past decade. Their losses appear poised to swamp their cumulative gains. And instead of throwing off free cash to solve the housing crisis, Fannie and Freddie may well require huge capital infusions, which may actually tie up federal dollars.
So, in effect, Obama has no housing policy. Or rather, he has a dream of subsidizing private developers, and suddenly, no way to pay for it. Not that anyone's asked him about this.
And, if any reporter reading this is interested in phoning him, they might also put in calls to our very own Senator John Kerry, author of legislation that's cleared the senate to establish a National Affordable Housing Trust Fund (S.2523), or to our veyr own Rep. Barney Frank, who's currently negotatiating the final version of the Federal Housing Finance Regulatory Reform Act of 2008, which incorporates the earlier senate bill. And yes, both the first and the final pieces of legislation identify Fannie and Freddie's profits as the answer to our housing problems. It might be time to rethink that, huh?
Freddie and Fannie are huge stories, as the market's wild ride today indicated. They are now the bagholders for 90% of the housing market, and taking on all of their liabilities would double the national debt (unless the taxpayer gets the assets, too) and potentially damage the credit rating of the US government.
Normally I would say, the more media attention, the better. However, some members of the national press have not exactly acquitted themselves with honor in covering the more arcane aspects of the housing mess.
But these are the reasons why I, and some others on this board, have been so strong in cautioning people to be very careful about purchasing houses now. We are currently undergoing the kinds of financial cataclysms that we haven't seen in decades. Those have the potential to affect the wisdom of a housing purchase this year a heck of a lot more than whether Sally's clients want a yard. If Freddie and Fannie actually failed, homeowners would be wishing for price declines as mild as 50 or 60%.
The urgency and magnitiude of this problem cannot be overstated. Most people who buy homes have little understanding that Freddie and Fannie are why they are able to obtain mortgages relatively easily at reasonable rates, if they are qualified.....Although...., F and F's problems trace to purchase of loans from unqualified buyers. The is a real crisis but this requires a solution that addresses the primary problem - lack of oversight and loose regulation. Unless this happens and the US Govt provides some reassurance, the stock market will go into freefall. Sound economics, not politics, will be needed to solve this problem. We need Freddie and Fannie and the US Govt will undoubtedly step in, but we taxpayers will all pay and mortgage rates will go up.
This story is HUGE! Look what happened to IndyMac Bank yesterday. Shuttered. People can't get money out of that bank until Monday. Depositors online accounts have been disabled. Scary!
The distinct possibility that American taxpayers will be on the hook for $5 trillion in mortgages ISN'T a big deal? This is a HUGE deal and as usual, the American sheeple are more concerned with waiting in line for the new i-phone than the fact that our economy is on the brink of collapse.
Don't believe the pundits when they say things to downplay the severity of this situation. These are the same clowns that said subprime was contained; real estate was going to bottom a year ago; the credit crunch was over in March (and it was time to buy financials); inflation is only 3 to 4% and all the other load of lies they insist on spewing.
The fact is Fannie and Freddie (and many financial companies) are essentially insolvent and it is all but a done deal that the government will socialize these two entities. When that happens here's just a few of the things that can/will happen:
- the US loses it's AAA credit rating;
- the dollar collapses causing food and energy prices to skyrocket;
- real estate prices collapse as credit virtually dries up;
- the stock market collapses
Things could very well go from bad to worse here in the ol' USA. Hope you enjoyed our brief reign as a global empire.
Got gold?
Fannie and Freddie won't fail. They can't be allowed to. They'll take down our financial system.
Stockholders may well be wiped out, and great amounts of limited govt cash soaked up.
And most importantly, relative to this blog, problems at Fanny and Freddie will almost certainly decrease mortgage availability, which will significantly hit the price of real estate.
As I have for the last 10 months, I remain significantly short the financial markets. I'm not just a bear on real estate.
Freddie and Fannie's failure was eminently predictable, as an aside. The amazing thing is that the newspapers took so long to pick up on what so many of us have been talking about for so long. If you believed house prices were going to fall, as I obviously did and do, then Fannie and Freddie are in deep doo doo. Their capital ratios are exceedingly thin and they guarantee mortgages during a bubble bust. What is so surprising about them getting killed?
Gold soars as fears mount over US mortgages
Allan Seccombe
Posted: Tue, 15 Jul 2008
[miningmx.com] -- MOUNTING worries about the global credit crisis are driving the gold price to within easy striking distance of $1,000/oz, with fears over a possible attack on Iran bolstering bullish sentiment around the metal.
Gold is at its highest level in three months, trading at $983.60.
News on Monday of AngloGold Ashanti shutting 4.4 million ounces out of its 11 million ounce hedge book was not much of a factor in the rapid rise of the gold price this week, said Matthew Turner, a senior commodities analyst at Virtual Metals.
gold has a very close correlation with the credit crisis
Bullish sentiment around gold has been fuelled by a 46 tonnes purchase of gold to meet an order for exchange-traded funds in the United States late last week, Turner said.
“It’s the return of the credit crunch. We’ve seen one large mortgage lender in the States close and there are a lot of concerns about this Freddie Mac and Fannie Mae bailout,” he said.
“The gold price has a very close correlation with the credit crisis,” he said. “I would say that is the main reason.”
When the credit crisis peaked in March this year gold bolted above $1,000/ oz before concerns abated slightly, cooling the gold price, Turner said. Gold hit a record $1,033.90/oz on March 17.
On Friday, the US had its third-biggest bank failure when IndyMac Bancorp collapsed.
The news was quickly followed by a the Treasury’s decision to bail out housing market financing companies Freddie Mac and Fannie Mae, which buy mortgages and sell them to investors.
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The two companies, which supply funding to almost all US mortgage lenders, are billions of dollars in the red as homeowners fall behind in their repayments leading to widespread defaults on loans.
The widely followed and respected investor Jim Rogers told Bloomberg the decision was an “unmitigated disaster”.
“I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers said in an interview with the newswire. “So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.”
George Soros, another respected commentator on markets, told Reuters: “This is a very serious financial crisis and it is the most serious financial crisis of our lifetime.”
The gold price could well spike through $1,000 if Israel attacks Iran, which is alleged to be building nuclear weapons under the guise of a nuclear energy programme. Iran has test fired missiles, sending a clear message it will retaliate if attacked.
The jitters about conflict in the oil rich region have fed into sentiment driving gold prices higher, said Marc Elliot, an analyst at Fairfax in London.
gold is not really something most people should invest in. Ever. Much like options, it has a role, but should be left to people who understand it.
Huh???? Gold is money; the only true money. What is so difficult to understand?
Gold is not an investment, it is an inflation hedge, and with inflation spiraling out of control, it was one of the few asset classes that one should own right now.
Gold protects you from the governments inflationary policies; it protects you from the FED's debasement of the dollar. Gold protects you from political and economic uncertainity.
Only a fool WOULD NOT own gold in these uncertain times.
You have to be brain dead to not understand gold, for gold is nothing more than money. The US used to use gold as money, in the form of currency backed by gold. And then the FED was created in 1913 and the rest was history.......
Right, because letting the world's reserve currency collapse is a much better solution than allowing Fannie and Freddie to fail.
Of course, to the FED, this is the best solution. Let 300 million Americans pay for the bailout with the inflation tax.
Saints preserve us from gold bugs.
Gold is a no different from a fiat currency - it has some industrial uses qnd can be a good hedge in certain circumstances.
It hasn't exactly been a great performer over time. Take a look at the price of gold in Jan 1980 and then now... even 1979 to now doesn't exactly look all that good.
Money doesn't exist, by the way. Its just a notationally efficient idea for resource accounting.
This blogger might want to review your comment before posting it.
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