New Housing Initiative Insures Freddie and Fannie's Survival

On a day when Keefe, Bruyette & Woods (KBW) pronounced the inevitable death of Fannie (FNM) and Freddie (FRE), the Administration announced a new initiative that insures that Fannie and Freddie will be around for a long time to come. I’m confused to say the least.

The plan revealed Monday by Treasury, HUD and FHFA is to provide assistance for first time home buyers and existing borrowers who are unable to afford their current mortgage. Some observations:


-I have not seen a joint announcement like this before. I read this to be a first step toward consolidating the very separate roles and standings of FHFA and HUD. This effort to stimulate housing is very much a team effort.

-The initiative will be directed through HFAs. These are State and Local housing and finance agencies. Heretofore these HFAs have not had a significant percentage of the total mortgage pie. It would appear that this is another example of “outsourcing.”

-Mr. Geithner said of the plan, “..it will help stabilize the housing market overall.”
Mr. Donovan the head of HUD said, “it will help in getting our housing market back on track.”

The Administration is directing its effort at the lower end of the housing market. For political and economic reasons this is the only segment of the market they can influence. That makes it the only right choice. The Administration has introduced the “Trickle Up’ theory.

-Senator Isakson (R. Ga) has been a strong sponsor of legislation that would expand the existing tax cut for first time buyers. That legislation may be trumped by the decision announced Monday. That remains to be seen. But if it turns out that way, it will be a window into just how political the Agencies are.

-Both Fannie Mae and Freddie Mac will play a critical role in this effort. They are both going to be bankers for the HFAs, “F/F will provide credit and liquidity facilities (to the HFAs)”. In addition, “the HFAs will issue mortgage bonds that Fannie and Freddie will bundle and Treasury will purchase them”. That’s right. Treasury will purchase the paper that comes from this. There are some restrictions but be assured this is going to happen as described. This is intergovernmental debt. It will not show up on a budget.

I thought it was interesting that F/F are going to be providing these services. It is a perfect role for them. But, it does make it a bit more difficult to declare them bankrupt and toast the stock as KBW suggests. This does not mean that the equity has value; it just means that the road to zero will be bumpy.

Comments

[Taymere:]

from www.treas.gov/press/re...

"The new HFA innitialtive will...br paid for by HFAs - not taxpayers;"

HAHAHAHAHAHAHA! what a steaming pile of buffalo exccrement that statement is. Where do the HFAs get THEIR money? From deficit state government spending. The States are not very independent from the Fed, they get money from the Fed that was originally federal income tax that gets recycled back to the states to strengthen the Federal control of the nation. Look at how they forced States to adopt 55mph highways with the threat of with holding hiwhway funds. They forced Hawaii to raise the age of consent by threatening to withhold hospital funds. It can't be said that only State taxpayers will take the hit through their HFA's they are too dependent on the Fed.

"While waiting for the measures that would revive the Germany economically, with a special eye on Schacht's plans, the Nazi hierarchy’s machinery took complete and sweeping control of the nation. Under the Weimar Republic, Germany had been a federation of sovereign German states. These individual states were now virtually disenfranchised, and a grid of Nazi party Gualeiters, or regional Nazi leaders, was superimposed on them. Statthalter, (state representatives) were also appointed for each state, and all the strings were held by Berlin."
-from "Hitler's Banker; Hjalmar Horace Greeley Schacht" by John Weitz

Oct 20 03:44 AM

[Taymere:]

I was wrong, STate taxes aren't at all involved in HFA funding, HFA's actually get ALL their money from the US Congress. This is a patronage system where the States wield power given them by the fed through HFAs. From page 2 of my link above "This will temporarily allow the HFAs to issue an amount of new housing bonds equal to what they would ordinarily be able to issue with the allocations provided them by Congress but are generally unable to issue given the current challenges in housing and related markets." So you see the taxpayer has ALWAYS been on the hook for the HFAs. Why must COngress allocate funds to HFAs? Because they are money losing enterprises. No money down loans at low interest rates are guaranteed money losers, that 's why the Federal government must allocate capital to them because the private sector certainly won't. Look, compassionately housing the poor through section 8 housing is fine, but it's just silly to try to put an indigent man's name on the deed via the mechanism of "home ownership" , they don't make magic markers strong enough to keep a poor man's name on the deed. Give a poor man control of the property and he will cash out refi it then lose it.


On Oct 20 03:44 AM Taymere wrote:

> from www.treas.gov/press/re...
>
>
> "The new HFA innitialtive will...br paid for by HFAs - not taxpayers;"
>
>
> HAHAHAHAHAHAHA! what a steaming pile of buffalo exccrement that statement
> is. Where do the HFAs get THEIR money? From deficit state government
> spending. The States are not very independent from the Fed, they
> get money from the Fed that was originally federal income tax that
> gets recycled back to the states to strengthen the Federal control
> of the nation. Look at how they forced States to adopt 55mph highways
> with the threat of with holding hiwhway funds. They forced Hawaii
> to raise the age of consent by threatening to withhold hospital funds.
> It can't be said that only State taxpayers will take the hit through
> their HFA's they are too dependent on the Fed.
>
> "While waiting for the measures that would revive the Germany economically,
> with a special eye on Schacht's plans, the Nazi hierarchy’s machinery
> took complete and sweeping control of the nation. Under the Weimar
> Republic, Germany had been a federation of sovereign German states.
> These individual states were now virtually disenfranchised, and a
> grid of Nazi party Gualeiters, or regional Nazi leaders, was superimposed
> on them. Statthalter, (state representatives) were also appointed
> for each state, and all the strings were held by Berlin."
> -from "Hitler's Banker; Hjalmar Horace Greeley Schacht" by John Weitz

Oct 20 03:59 AM

[ATWshop:]

Wow Taymere... you need to get up to speed with the Past. This is nothing new, the Feds have been making loans through these agencies for 50 years! All they are doing is just adding more layers of bureaucracy to the mess to create more rules and jobs, cut down trees and print more paper. Jobs for the agencies... jobs for the lumber mills... jobs for the paper industry... jobs for the printers.
Comparing what is happening with our housing markets to Nazi Germany is a real stretch. Sounds to me like you are laboring under the "Chicken Little" syndrome or you may be deemed just another alarmist that makes up conspiracies.
The real crock of bull comes from the idiot analyst Keefe, Bruyette & Woods (KBW)... thinking that the stocks will go to $0.00. The idiot that made this statement should be fired.
So far this year I have profited nicely by playing FNM & FRE... currently standing at $118,000 of profit. Fully expect to profit even more due to the recent drop in share price. But I am fully aware that not everyone shares my opinion of the potential here... you keep worrying about what "might" happen and I will continue to make money on the come back of FNM & FRE.

Oct 20 05:33 AM

[John McLeod:]

No need for confusion on this. If F&F die, the effective guarantee has to be clarified -- door #1) haircuts to bondholders large enough to sink the entire world financial system; door #2) nominal value of US National Debt doubles and economists go nuts changing their computer models to prevent their showing that America is in a state of collapse. Long live the obfuscation!

Oct 20 06:45 AM

[HardwoodFlo...:]

Well right now the gov has it set up so no banks want to lend anything other than FHA (fannie/freddie). they don't want to put money at risk becasue they don't have to witht he gov backstop....

But here is what is worse:

Well the housing numbers came out and guess what - they still suck. Know why, people cannot get financing.

Talking with a banker here is what he said:

"If s guy comes in and what's a loan and is credit worthy but not a customer of the bank we will not lend him. We will not lend him because we have no incentive to do so. We hare being asked to keep our cash ratios at peaks. So , if we loan out more "new"money we are forced to bring in more capital to offset it. Well it's harder to raise capital than it is to say no- so we just say no. The only exception to this is if they are a good customer and we have a commercial relationship with them or something other than just doing "new" business."

So wonder why housing sucks- there it is. The reason in a nut shell.

The government with all of their intervention has this country scared of it's own shadow at this time....

Oct 20 10:01 AM

[Easy R:]

This is ridiculous. It was "Average Joe" who got the US and the world in the mess we're in (not Wall Street, as populist media articles and left-wing Democrats are brainwashing everybody into blaming). "Average Joe" took mortgages he cared less about not being able to repay and the government twisted banks' arms to lend that money. "Average Joe" refinanced and took money out of the skyrocketing house values so he could buy electronics, cars, vacations, boats (in Florida), etc, etc. Then the bubble burst and "Average Joe" decided there's nothing wrong with not repaying the money he had already used. Moreover, today he cries about losing "his" house (when in fact he borrowed 100K which he never repaid - so the house was never "his" - for a house now worth 60K).
So now the government wants to fix things by giving new "Average Joe"s money they will not afford to repay. What makes anyone think the outcome will be any different? Why can't people rent and then buy a house only when they saved all the money needed to pay for it? Had anybody done the math they would also know that owning is a much more expensive proposition (in terms of both money, time, resources, and aggravation) than renting; owning is overrated and most of the time it is just a status symbol coveted by the vain.
Why seed the roots for the same catastrophic scenario that just halved everyone's net worth less than a year ago?

FYI, I do own [paid for] houses and wish I did not because they're not worth the valuable time I have to spend with their maintenance and all the other property managing related routines. There's so much more to life than owning "stuff" and I wish I had more time to learn about the world and see more of it rather than ordering and reordering my possessions.

Oct 20 10:56 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. Unless, of course, you are holding a knife and fork while the butcher block transactions occur:
www.reuters.com/articl...

NEW 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 due Dec. 15, 2011, said a market source familiar with the offering.

The notes were priced to yield 26 basis points over comparable U.S. Treasuries.

The joint lead managers on the sale were Goldman Sachs, Citigroup and Morgan Stanley.
More of the same: only the brand names GAIN.

Oct 20 11:55 AM