Fannie and Freddie: Worthless?

According to Bose George, analyst at Keefe, Bruyette & Woods, the two government sponsored entities that buy mortgages from banks have zero value to common shareholders.

KBW downgraded the shares to Underperform and lowered the price target to zero from $1. The primary concern is that the mortgage giants have been bailed by the government to the tune of nearly $100 billion, and according to George they will still be heavily indebted to the US government even ten years down the road. In addition to the bailouts Fannie Mae (FNM) and Freddie Mac (FRE) have already received, there is a strong probability that further capitalization will be necessary for them to survive. The CBO has said that the two will require nearly all of the $400 billion in taxpayer aid already pledged by the Treasury.

Interestingly, KBW set its previous $1 price target back in April, a month when neither FRE nor FNM broke above the $1 mark. While it would be difficult to call that a bullish stance on the stocks, they at least believed they had some value at that point. Now, more than six months later, the housing market has not recovered as many had hoped and earnings power for the two GSE’s is still very much in doubt. Few analysts are willing to issue earnings estimates on these entities, and the few that do foresee another ugly year. Over the last two years, the companies have lost a combined $165.3 billion.

The two GSE’s are still responsible for financing 70% of new mortgages, but there is credible doubt whether they will survive in their current form. Even with a substantial improvement in homeowners’ ability to pay their mortgages each month, the debt burden could be enough to wipe out common shareholders. With that being said, we are skeptical that foreclosures will abate in the next few months and we expect the housing market will be soft for some time. These GSE’s are important to the financial system and will not be allowed to fail completely, but that does not mean that their equity has any value.

It should come as no surprise that we cannot advise holding these shares, and at this point we think these shares are little more than a tool for speculators.

Original post

Comments

[Moon Kil Woong:]

Although I have to commend KBW for seeing the obvious (that these companies are bankrupt and have negative value with no viable business model), I wonder how they ever convinced themselves in the first place that they were worth something? If this stock as they explain serves as a tool for speculators do they also admit they serve as a tool for speculators as well?

Oct 20 06:28 AM

[BRUCE E. W.:]

Throwing the housing market to the wolves seems to be in vogue. I see it as the equivilent to selling it all short and creating a graveyard for many people who are trying to salvage their homes; a landfill garbage dump for scavengers in private equity; a waste treatment center for financials and a triage center for government agency. Meanwhile it is the most visable profile of existing misery which the financial sector would like to see go away (continually reminding us of the failures they conjured up with their derivitives markets...still being propagated and progressively extended to cover the same debt recovery process by way of more of the same). And to top it all, no less than the ultra conservative CATO Institute is now instituting a propaganda war (the intolerable aspect of "Socialism" must be treated like contraband by the Taliban) with a major conference on "What to do about FNM & FRE. Jeeze...I didn't know they cared! The government has a job to do separate from the markets and one of them is to secure the foundations of socially exceptable standards of living. Everyone is aware of how the "dogs of market -wars" operate. In this case we need to concede that the market was not working properly because of total manipulations in the first place that created this default syndrome. Why should we suddenly believe the same people who will stand to gain from the scavenging that will occur by ripping these mortgage markets open and bleeding them to death.

Oct 20 10:01 AM

[Duude:]

These companies will survive but not as private companies. They're simply an arm of the US government. They will never be recapitalized, broken up or spun off with a new public offering. They have far too much bad debt and taxpayers won't stand for more tax dollars to recapitalize it. This is unfortunate because it only means the government will continue to subsidize mortgages, creating a bigger and more dangerous bubble. Government believes the best fix for a bubble is to make it bigger still. Taxpayers are already buried in debt and the government is now building a mountain with more and more dirt on the corpse of taxpayers everywhere.

Oct 20 10:09 AM

[ebworthen:]

The logical extension of the analysis of Fannie/Freddie is that U.S. Government debt is worthless.

After all, the Fannie/Freddie debacle is simply an extension of the government model.

The only way all of the FED and government debt can be repaid is to confiscate the assets of individuals, inflate like crazy - to the verge of hyperinflation, or start a nice big war.

It's madness I tell you....madness.

Oct 20 10:42 AM

[Gem Hudson:]

Wealth building are to work out the business. Because working out the business are to know how your business works. How ever you business work for you. Work out the business and the wealth of the dollar are to sell and to produce what would sell for you. Because earned money are capital money.

What we need are to reconstruct the economic.

Oct 20 11:04 AM

[viewfromnyc:]

While I have thought FNM and FRE are worthless for a while, without a shut down condition there is value to the equity. The value is not in the traditional sense of positive shareholders equity on the balance sheet but option value. If this company is never shut because it lacks capital, eventually the new profitable business that is being written will restore the equity. Right now the movements in the stock are short term speculation since the strike price of the option is so far out of the money.

Oct 20 11:11 AM

[BRUCE E. W.:]

www.reuters.com/articl...
20425289200NEW YORK, Oct 20 (Reuters) - Freddie Mac (FRE.N) (FRE.P), the No. 2 U.S. home funding company, on Tuesday sold $3.5 billion in new two-year reference notes that were priced to yield 26 basis points over U.S. Treasuries.

The joint lead managers for the sale were Goldman Sachs, Citigroup and Morgan Stanley. NOW ISN'T THAT CONINCIDENTAL AND VERY INTERESTING?

Oct 20 11:21 AM

[dragonpaw:]

Bruce E.W.; your last comment well summarizes the banksters position in this debacle. The idea that the banksters have raped and pillaged the country is no better a reason that Fannie and Freddie are doing the same under gov't pretenses.
Our gov't has no constitutional right to "secure socially acceptable
standards of living " for its populace; much less those of "illegal aliens."
This socialistic mentality pervades a good part ot the progressive-liberal mind-set. It has come about as a result of entitlement -based thinking; wherein many claim to have "earned"therefore are "owed." Our Ponzi-like social systems are on the brink of financial collapse. Yet we continue to have the hubris to think that world will continue to finance our follies. The latest health-care fiasco is another extension of this self-centered arrogance.
Wake up and smell the stench; "We have seen the enemy and he is us!"

Oct 20 12:43 PM

[JeffDB:]

On Oct 20 11:11 AM viewfromnyc wrote:

> ...eventually the new profitable business that is being written will restore the equity. ... >

That presupposes that any new business being written is "profitable", however. From some of the articles I've seen, they're still writing mortgages at very low interest rates with little to no money down even for people with marginal credit scores. Not too surprisingly the delinquencies were at very high rates just a few months into the new contracts.

The one thing in their favor, however, is that the government seems to be doing its darnedest to inflate the values of everything, or perhaps more accurately to devalue the dollar and hence the debts of the debtors. That, of course, should inflate the value of the homes in nominal terms and reduce the default rates. That seems to be the current game plan as far as I can tell, and *IF* they can pull it off, perhaps there will be some value in the equity of Fannie & Freddie. But that's a mighty big "IF", and it would seem to me that the inherent costs in that strategy, not to mention the significant risks, should give them pause to rethink it taking into account the full costs and benefits involved.

Oct 20 01:38 PM

[Anandakos:]

@Duude,

In actual fact, the total indebtedness of the all sectors of the US economy is very nearly exactly the same today as it was twenty-four months ago at the first rumblings of the crisis. Yes, government debt has ballooned, but private debt has shrunk by the same amount.

Would you <i>really</i> have preferred an <i>actual</i> shrinkage of the total capital debt of the US economy by 2.5 trillion dollars in two years?

Yes, over time it needs to come down a percentage of GDP, most likely by growing more slowly than does GDP. Actually shrinking total debt when investors are rushing equity capital out of the country to emerging markets would be insane. Are you a bond ghoul who would love to be paid back with ever scarcer and hence more valuable dollars? If so, admit it so we can evaluate your posts accordingly.

Since the capital base of American industry is steadily shrinking through disinvestment and depreciation, for the US to "grow its way out of this recession" -- everybody's favorite prescription -- it must have capital. Long term equity capital is vanishing from America as rapidly as the middle class. We either borrow (more productively than in the past to be sure) or we sink into genteel poverty like most of quaint and lovely old England.

On Oct 20 10:09 AM Duude wrote:

> These companies will survive but not as private companies. They're
> simply an arm of the US government. They will never be recapitalized,
> broken up or spun off with a new public offering. They have far too
> much bad debt and taxpayers won't stand for more tax dollars to recapitalize
> it. This is unfortunate because it only means the government will
> continue to subsidize mortgages, creating a bigger and more dangerous
> bubble. Government believes the best fix for a bubble is to make
> it bigger still. Taxpayers are already buried in debt and the government
> is now building a mountain with more and more dirt on the corpse
> of taxpayers everywhere.

Oct 20 03:15 PM

[drpaul1139:]

You know one thing that I have not witnessed in these mortgage discussions is the challenge to the current design of the fixed rate mortgage instrument?

The word Quantum comes from the Latin "quantus", for "how much."

I know for a fact that when we use some simple observations from quantum physics we can get a dramatic and better fixed rate mortgage design favoring the buyers, while balancing the buyers, sellers, and the capital markets.

When this new fixed rate mortgage design is the case then we will get a private sector mortgage banker IPO where 44.4 US million mortgage holders will instantly gravitate to and we do not need government i.e. Fannie and Freddie involved in mortgage financing.

Oct 20 03:28 PM

[Thomas J. G...:]

There is no fnm/fre for a retail investor to short hence this is an academic discussion. It looks like you can buy options so maybe there is some point in discussing this. From an accounting standpoint you have to say there is no value. All common equity has been wiped out by losses. It would be interesting to see what would really happen if the fed stopped buying their debt. fnm/fre probably aren't recognizing all the losses they really have. From a political standpoint the left leaning people in power place common shareholders low on the list of people to show mercy too. But you never know. Maybe Barney Frank would somehow feel some sense of redemption if fnm/fre original shareholders had some value in the marketplace. But that's hard to believe.

Oct 20 04:09 PM

[ATWshop:]

I can not imagine that "anyone" in the US has the ability to forecast with any degree of certainty what the value of FNM or FRE stocks are.
That being said, no one can argue that both at technically bankrupt.
Lastly, this leaves us with only one option.... Short-Term trade the swings as I have been doing all year. When you buy, be sure to add a Trailing Stop in case another idiot analyst decides to make a name for himself by downgrading one or both.
I managed to catch 3 or the 4 run ups this year and am currently sitting on a profit of $118,000 from just these two stocks. I could care less what the value will be 10 years from now... I just want to stock price to run up and down so I can make more money.
For that matter, I could care less what any stock is going to be worth 10 years from now... just get in, make some money and get out.
No need to beat the company up and worry about some value in some distant future... just my opinion, but I love volatility... great way to make huge profits.
Take a look at the 3X ETFs if you want to see some real crap... whether you play the Long side or the Short side...they are all losing money!!!

Oct 20 06:23 PM

[Plan B Econ...:]

Worthless..yes. Otherwise, these companies wouldn't be sucking on the teet of the government and would be able to survive on their own two feet. No worthwhile business of that size should be on the dole.

Honestly though, not many private enterprises are active in the mortgage market these days...and understandably so with mortgage delinquencies skyrocketing...

www.planbeconomics.com.../

Oct 20 08:14 PM

[Bolton Peck:]

@Dragonpaw there's a big difference between 'entitlement based thinking' and deserving to be given a fair shot-the one our parents got. That is, not to be raped by loan sharking subprime lenders. I've heard this old 'Socialism is evil' saw more than once, but I've been to an actual socialized country-France. And you know what? It wasn't that bad! Free speech and all the other freedoms we get here in America, plus an actual, strictly regulated banking system and a government that exists in fear of the people-as it should. Oh, and single payer health care.

With their cushy 35 hour work weeks, near full employment, 90 minute lunches, and a decidedly more family oriented (as opposed to material oriented) culture, I think that maybe, just maybe, it isn't that bad to actually use the government via taxes to redistribute a large portion of wealth so it doesn't all end up at the top. Like now, in the USA.

Why do you think all those people are losing their houses? People like me? It isn't because they're deadbeats, or they're all out refinancing their houses every year to put bigger dubs on the Escalade. It's because they lost their jobs en masse, and can't find another one! And why is that..?

Because the seven hundred billion dollars we taxpayers gave them, without our consent, to free up the credit market, STAYED RIGHT UP THERE AT THE TOP AND DIDN'T TRICKLE DOWN!

Oct 20 11:59 PM

[Bolton Peck:]

I own a small business-it has (barely) kept us in our home, and I couldn't get business credit to save my skin right now. Obama's HAMP plan has allowed us to keep our house after our income was cut in half by a twenty percent unemployment rate (yeah, I know the stats say 'not quite ten percent' but we also know the real score) and the primary breadwinner losing her job for a year.

It doesn't matter how much money they print, when the top five percent of the populace holds over 90 percent of the wealth-they just grab up all the newly printed money as well. There is no middle class any more, and it isn't because of taxes. It is because of debt. To the banks.

Oct 21 12:07 AM

[BRUCE E. W.:]

Realistic and very practical insights. The truth is that most of the "talking point" heads like the one you are responding to do not live their lies. They know nothing of the history of Poor Laws; convieniently forget that the GI Bill was one of the greatest upwardly mobile and tactically successful administrative policies in the history of all civilization; disregards the great public education system developed over the 20th century; would undoubtedly reject the public health system that largely runs so cleanly because it is not seeking personal gain alone...and a host of other items that are not determined by the simplistic leverage of sweat shop ownership and one party rule. These people can't define the terms they are using because they are repeating a set of terms given to them by their masters. The process is exclusive membership; and they want to associated with its privaledges. What they forget is that the strictest autonomist ownership is aristocracy; and the rest trickles down from that position to relative levels of social distribution. The irony is that their version of freedom is an enslavement process of others. Even Adam Smith said that it was the governments job to procure the standards of living for its people. There is no reason why free and open markets are threatened by such agency. It is only those people who are trying to turn my freedom and rights to the pursuit of such interests into a market eunich that are a true threat. No one has the right to "own" the economy and control the life paths of democracy. Only a market version of the Taliban capitalist has attempted to coerce America into mindless robotics (incidently; Robot is Chech. for worker). But it is the people not the system. National Socialism was a crime against humanity but it was inspired by fascism which is the dirty word for corporatism. And it is corporatism that is being peddled as free market thinking in America today. I don't think there are tlking points about this from the neocons. They just act indignantly outraged and throw more rhetoric.


On Oct 20 11:59 PM Bolton Peck wrote:

> @Dragonpaw there's a big difference between 'entitlement based thinking'
> and deserving to be given a fair shot-the one our parents got. That
> is, not to be raped by loan sharking subprime lenders. I've heard
> this old 'Socialism is evil' saw more than once, but I've been to
> an actual socialized country-France. And you know what? It wasn't
> that bad! Free speech and all the other freedoms we get here in America,
> plus an actual, strictly regulated banking system and a government
> that exists in fear of the people-as it should. Oh, and single payer
> health care.
>
> With their cushy 35 hour work weeks, near full employment, 90 minute
> lunches, and a decidedly more family oriented (as opposed to material
> oriented) culture, I think that maybe, just maybe, it isn't that
> bad to actually use the government via taxes to redistribute a large
> portion of wealth so it doesn't all end up at the top. Like now,
> in the USA.
>
> Why do you think all those people are losing their houses? People
> like me? It isn't because they're deadbeats, or they're all out refinancing
> their houses every year to put bigger dubs on the Escalade. It's
> because they lost their jobs en masse, and can't find another one!
> And why is that..?
>
> Because the seven hundred billion dollars we taxpayers gave them,
> without our consent, to free up the credit market, STAYED RIGHT UP
> THERE AT THE TOP AND DIDN'T TRICKLE DOWN!

Oct 21 11:28 AM

[BRUCE E. W.:]

The jargon you recite I've heard on Fox propaganda channel from irate pudits of demagoguery and professionalized moral hazzard. I won't waste energy trying to convince you to study your terms in that regard.
However, you do make a vital point in regard to corruption and perverted incentives coming from these public trusts. Afterall, it is not only the same group but in this case the marriages between business and government are actually structured into the institutional process itself instead of bought and paid for under the table. The truth is that any degree of due dilligence will uncover slippery slopes of ethical contrivances and shadey relationships even by simply doing a quick internet search. Whatever is actually uncovered and exposed, of course, is only a suggestion of how much powerful positions of trust and finance can be offset by private interests that are contrary to the positions of both government and utility driven commercial institutions.
But are you in any way suggesting that this reasonably chronic problem in business AND government is anywhere near the proportions that caused this particular international financial crisis?

Even if you look at ENRON as your model you can see that the private sector sees the public sector as one big cash cow. Mixing the two under privitiztion has produced astronomical overpayments to outsourced military necessities under Rumsfeld's schemes to mix his public authority with private interest rewards against the public trust. Lest we forget it was supply side Bush and crony Paulson who wiped out the Treasury with all they could take and set up this whole bailout scheme in the first place: And in regard to your eighth grade understanding of "socialistic mentality and progressive liberalism" (whatever that actually means in real American living time mindset), even your demigod Ronald Reagon created one of the most dramatic Government social projects from all of history when he helped establish the irrigation system for central California and converted what was American family farming constellation into centralized Too big to Fail Agribusiness Titans that wiped out all competitive variation from the farm industry of the West Coast Basin area. Handouts to Corporate interests from Government were over the table and direct during the Bush years giving rise to the term Corporate Welfare. And still the cheating got bigger than ever and too big to mention (by the Central committees that sat in with Cheney to discuss how petrostroika USA could be implemented through crisis and legitimation theories and consensus alliances, confront groups, neoconservative think tanks, strategic government.commercial mergers and political economic alliance theories that seek to undermine a democratic majority.

So give it a break, chump; you have a good point about pervasive corruption but it shouldn't and can't be used to push your junk bond mentality on a grown up American who's been there and seen enough of that kind of bullshit in Manhattan and has heard enough and seen enough to start standing up and talking back...and whatever else is necessary in defense of an American ethic. Its not the banks generally that are the problem. It's the top psychotics at the top who have pirated the American financial system and think we are all to stupid to get up and take them down.

On Oct 20 12:43 PM dragonpaw wrote:

> Bruce E.W.; your last comment well summarizes the banksters position
> in this debacle. The idea that the banksters have raped and pillaged
> the country is no better a reason that Fannie and Freddie are doing
> the same under gov't pretenses.
> Our gov't has no constitutional right to "secure socially acceptable
>
> standards of living " for its populace; much less those of "illegal
> aliens."
> This socialistic mentality pervades a good part ot the progressive-liberal
> mind-set. It has come about as a result of entitlement -based thinking;
> wherein many claim to have "earned"therefore are "owed." Our Ponzi-like
> social systems are on the brink of financial collapse. Yet we continue
> to have the hubris to think that world will continue to finance our
> follies. The latest health-care fiasco is another extension of this
> self-centered arrogance.

Oct 21 04:49 PM

[WTF@USALOL:]

THERE IS NO EFFING REAL-ESTATE "MARKET". A market is made by some degree of liquidity, and it's clear that this market has none! (Eddie Murphy just cut his asking price on a place 10 minutes outside Manhattan in half, and still no takers!) The artificial support seen by many insiders as a bottom is false. Wait till the bottom drops out of high-end SoCal, wait till $10 million properties are going in default all over the place. Any "hope" lent my the inappropriate, but deemed "neccesary" actions of our government/banks will not last. There is no demand for new housing, yet they keep building. I don't understand why FRE/FNM continue to trade. It literally makes a mockery of our public markets. For that matter I don't understand why any quasi-governement agencies trade publicly. If it threatens the whole system that all these too big to fails are so inextricably linked, PERHAPS WE SHOULD TAKE THOSE WITH THE GREATEST DEGREE OF SUSCEPTIBILITY OFF PUBLIC MARKETS. Wow, some creative thinking there, which has escaped all those in power charged with fixing a mess they created. OMAB, SWGO.

Oct 21 07:03 PM

[a fat panda:]

Who are we kidding? Freddie and Fannie are just the housing equivalent of food stamps. The only difference is that you don't have to be poor to enjoy the welfare. The only requirement is that you are breathing.

Oct 22 11:22 AM