What If Fannie and Freddie Could Go Private? [Housing Tracker]

Quotes of the Day 

"Without such a plan like this, shareholders might get zero. You want zero or ongoing companies?" - Dan Fuss of Loomis, who says the government would have to offer preferred shares in Fannie and Freddie that could be converted to common stock.  (24/7 Wall St., Aug. 26) 

"Mention subprime mortgages, and the connotation is so negative that just the sound of them makes people cringe. That's the hallmark of a great distressed opportunity." - Steve Persky, CEO at investment-advisory firm Dalton Investments, who is buying subprime mortgage pools at pennies on the dollar now. He plans to get by on the interest paid on the mortgages, while he sifts through the complex pools to find the good mortgages that were mixed in with bad. Persky thinks it’s the opportunity of a lifetime. (Barron’s, Aug. 25) 

"The purpose of the bailouts should not be to maintain high values in the housing market, the stock market or any other speculative market. The essential purpose is to prevent a fundamental loss of economic confidence in our institutions and in each other, and to maintain a sense of social justice." – Yale economist Robert K. Shiller. (Forbes, Aug. 25) 

Subprime Banking Fallout

Keeping Fannie Mae And Freddie Mac Private.  “Freddie Mac (FRE) and Fannie Mae (FNM) could raise money on their own and without a government bail-out which would wipe out common stockholders and investors in some of the preferred in both companies. Freddie was able to sell $2 billion in short term notes Tuesday. Pacific Investment Management and Loomis Sayles, which control several of the largest bond funds in the US, each said they might put money into preferred shares of the two mortgage companies… The government must say that it will not undermine the opportunity for the companies to stay private or it must face a skeptical market which has no interest in investing only to lose all of its money.” (24/7 Wall St., Aug. 26)

Thornburg Survival in Doubt, Seen Completing Tender. “Jumbo home loan specialist Thornburg Mortgage (TMA) said its survival remained in doubt following additional margin calls, but it is on track to complete a restructuring and avoid collapse.  Chief Executive Larry Goldstone: Thornburg expects to complete an exchange offer next week for some preferred stock that will ensure its survival… Thornburg ended June with $27.2 billion of adjustable-rate mortgage assets on its books… Goldstone called financing terms from Thornburg's lenders "onerous," said mortgage securitizations have "come to a screeching halt," and said Thornburg has not been able to restart loan originations.” (CNBC, Aug. 26)

FDIC List Of Problem Banks Suddenly A Lot Longer. “More than 100 banks are now in danger of failing, the Federal Deposit Insurance Corp. said today. To guard against possible shortfalls in deposit insurance, the agency will likely bolster its insurance fund this fall by charging high-risk banks more in fees than safer ones. The number of banks identified by the agency as problems increased by 30% during Q2, to 117, from 90 in Q1. That’s the highest number since mid-2003. The combined assets of problem banks stood at $78 billion, a threefold increase from $26B in Q1. IndyMac Bank, which failed last month, accounted for about 40% of the increase.” (Financial Week, Aug. 26) 

For Better Banking, Check Out a Credit Union. “Bankrate.com economist: "Credit unions very often beat their banking counterparts in terms of offering lower rates on loans and higher rates on deposits… Credit Union National Association: Nearly 90 million Americans already do some banking at a credit union and that figure rose by more than one million last year... Total deposits are about $800 billion… There are now 8,500 credit unions around America. They traditionally grew up around a particular community or the employees of a big company, and their membership is limited to a defined group. As non profits, they are exempt from taxes.” (WSJ, Aug. 26) 

U.S. Financial Firms Hoarded Cash: Report. “Thomson Reuters report: Big U.S. financial companies hoarded cash so they would not be strapped amid a credit crunch that has lasted more than a year. Financial firms that are part of the Standard & Poor's 500 stock index raised the cash and cash equivalent portion of their total assets to 4.5% in Q2, up from 3.0% for Q2’07.” (Reuters, Aug. 25) 

Fannie-Freddie Crisis Spreads. “JP Morgan (JPM) warned of a possible $600m (£323m) loss from its holdings of preferred shares in the two mortgage financing groups. JPMorgan said it would write down the value of its $1.2bn of preferred shares in Fannie and Freddie by half. Banks and insurers own most of the $36bn in preferred stock in Fannie and Freddie, and JPMorgan’s announcement will raise pressure on other holders to make similar writedowns. Preferred shares are a hybrid of debt and equity and are attractive to investors because they pay interest above equivalent debt instruments.” (Financial Times, Aug. 25)

A Financial-Stock Swoon Weighs on People's United. “Despite a [weekend] Barron's article [saying] People’s United Financial (PBCT) had escaped the credit crisis by eschewing subprime loans… New England's largest regional bank is sitting a top $2.5 billion in cash and may soon snap up a struggling rival… It may look pricey at 29 times forecast earnings of $0.57/share in 2008, but the comparable S&P bank index trades at 30 times, owing to so many banks' poor earnings. Back out People's cash, and the bank looks even cheaper: It trades at 1.07 times book value of $15.63 a share, and 1.5 times tangible book of $11/share. Meanwhile, it yields 3.6%, having raised dividends for 16 years running. The stock could see as much as 20% upside.” (Barron’s, Aug. 25)

 

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Comments

[gabe borens...:]

Totally unnecessary question.We have a private sector which provides the mortgage financing .The Act of Congress had created the FNM and FRE to add additional liquidity to the mortgage market .In addition by an implicit guarantee,both agencies had added more stability into the market.In fact both agencies were able to raise several billion dollars of new capital because most of the investors understand that U.S governmemt(Treasury )could not allow a failure.Given the current volatility and risk distortions topic of privatization would only add to the price volatility of the shares of both agencies.
It is clear that both agencies are managing their risk quite well. In fact better than the banking institutions which have a greater "default" rate .
What I do not understand is why the privatization issue was not considered two years ago when allegedly the action to privatize would not hurt the shareholders.
Ultimately ,there is no need for another private mortgage lender as that exists now.What we need is to have the agencies that can facilitate mortgage financing during the market paranoia ,uncertainty and distortions.
As of now both agencies are responsible for 80% of the mortgage lending activity.No doubt an implicit goverrnment backing provides that flexibility.
Both agencies as structured now have done and will be doing a great job.
The privatization topic is an idea from the shorts(record open short interest in the shares of both agencies),hoping that the move would wipe out the share holders and allow the shorts to"cover" at zero.
In the meantime both agencies look great and will look better as the real estate market consolidates in the period ahead.

2008 Aug 27 09:10 AM

[Stan Muse_:]

As I understand it, FNM has a market cap of about $6.5B and is backing $5 Trillion in mortgages. They have about $40B in cash reserves. Doesn't this just seem way out of whack to everyone, given the state of the mortgage crisis? Their cash reserves can only cover 1% of defaults. The defaults are occuring at over 1% per month. How long can FNM possibly survive in their current state? Most of the experts say the mortgage crisis will continue for at least another year. I think we are in for a hell of a meltdown unless the government writes FNM a blank check for over $300B, without knowing if that will even cover until this is over. I just do not see that happening. FNM is a day trade at best, there is no way I would hold a common position over night.

2008 Aug 27 06:40 PM

[Kinabalu:]

Stan Muse

It really doesn't take that long to look at a balance sheet and get the right numbers. At 6/30/08 FNM had total assets of $886 billion and total equity (Market Cap is irrelevant) of $41 billion for a capital ratio of about 4.7%. Cash reserves of about $50 billion would cover a default rate of over 5%. I don't know how bad their portfolio of loans is but given their mission I would doubt that they will come any where near the default rates of the purveyors of the complex securities are.

A 4.7% capital ratio isn't great but it isn't that bad either. Originally S&Ls were only required to keep a capital ratio of 3.5%. They ran into trouble when they expanded their business outside the home lending category. All this noise about FNM going under may be way overblown.

2008 Aug 28 01:17 PM

[FNM Dude:]

I don't see how the take over of either of these companies without buying out the investors is legal. FNM claims they can weather the crisis and it hasn't become insolvent. I bought as a long term gamble; the company isn't bankrupt so the government should let it run it's course. Punishing FNM shareholders because FRE is on the brink seems like seizure without due process.

2008 Sep 07 08:07 PM

[BHMTom:]

I'm not smart enough to figure this out. Bad home loans at 85% to 115% of selling price would have required PMI, Remember that stuff?I paid it on my first home and financed out of that scam with in the second year. These people paid to cover the banks risk in a crappy loan. Wheres the pay off. Shouldn't these be backed by an insurance policy in the case of a foreclosure? I har nothing on this. Or is one of the biggest insurance scams perpetrated on American soil?
I tried to bring some cash back into America, You know there is a 35% tax on that? Leaving it parked. Stupid of America. Uncle SamBo realy help the crisis..Eliminate, yes I said ELIMINATE the capital gains tax on investment property. How fast do you think homes would be gobbled up? A week, maybe 10 days? Just like them not lifting the gas tax when we were all crying about gas prices. Government acts so slow to dead when it comes to cutting taxes, but sure can wear out a printing press like a teen ager wrecks a new car.
No serious, e-mail me about PMI and where did it vaporise. tcd60 at yahoo

Feb 19 01:22 AM