The Fannie/Freddie Heist

It's alarming to think the Feds can swing this big baseball bat called 'our tax dollars' so freely.  With a seemingly open checkbook, Treasury effectively took the reins of the GSE's, guaranteeing home mortgages with US taxpayer money.  It's not as if our country could afford this.  The national debt just doubled overnight, what with the guarantee of nearly 6 trillion in home mortgages.  Now, I've heard the fear-mongering...from Paulson, Bernanke and others...that a much more serious problem would have occurred without some intervention.  How do they know this?  Have we been in this mess before? I believe free markets should be left alone to settle, and if there are failures along the way...so be it. This entire mess will not be fixed with the stroke of a pen.

More Write-offs, More Pain

Who is feeling the most pain from this deal?  Naturally, the US taxpayer will take the biggest hit.  Banks will also suffer in the short term and the long term.  You see, many banks hold large sums of FNM/FRE preferred stock on the balance sheet.  And why not?  Nice, high-yielding paper with less risk than equity.  Well, last week the government just effectively wiped out the preferred, replacing it with senior preferred. 

What does this mean?  We've been finding it out for a week now - banks are having to write-down losses on their balance sheets of large size.  Effectively, banks are taking assets off and reducing their capital.  But, banks have minimum capital requirements, so hence they will have to sell assets to meet those levels.  But, it's not just banks.  We learned the other day that Wellpoint (WLP), an HMO, is writing down over 200 million of Fannie preferred.  How many others are out there?

Housing Stability, or Is Trouble Brewing?

Perhaps the government backstop of mortgages is a good thing.  After all, the implicit guarantee has been there all along, right?  I'm just not sure this is the time to be throwing money into a black hole.  There is no sign housing prices have stabilized, and they could get worse.  More supply is out there than ever before.  Big mortgage resets are due to occur in 2009 and 2011, and if those homes are released onto the market, how will that effect prices?  Further, will banks be under more pressure to shed these homes?  It's tough to speculate on any scenario, but clearly headwinds are there.

Is It Fair?

As a homeowner, for me the American Dream is a reality.  But for many, the Dream has become a Nightmare. Job losses are rising, home prices are dropping, inflation and high gas prices are still in effect and the economy is weak...and that's just domestic issues.  I'm not sure this bailout plan is good for everyone.  Sure, it helps bonds and mortgage-backs recoup some value.  Stabilizing rates are good, and may foster some demand...but there is no guarantee.  The disarray behind a failed fnm/fre might have caused a panic.  So, we'll have to wait and see how this whole thing plays out. 

Disclosures - none.

Comments

[unlawflcomb...:]

Regarding the "fairness" issue — it's not fair at all. Why should smart renters — who correctly assessed the bubble nature of the housing market, and abstained from buying overpriced homes — also be stuck with the tab? Why should those of us who wisely stayed out of the housing market have to pay for this mess.

This is a form of wealth redistribution. It's a redistribution of wealth from the "responsible" to the "irresponsible." It's a redistribution from workers and non-speculators—to speculators, financiers, & con-artists.

There is nothing "fair" about the Fannie-Freddie bailout. And it will simply perpetuate speculative and irresponsible investment. Worse still, it will bring even more in the future, necessitating even more bailouts.

2008 Sep 14 10:51 AM

[Garya:]

Who says that the treasury is taking the GSE's on the balance sheets? They are saying that this is a temp situation and that they are NOT putting them on the government balance sheets. I don't know how they can guarantee the bonds while keeping them off the balance sheets. I think the government is lying. They cannot have it both ways.

2008 Sep 14 12:15 PM

[JIMBO el GR...:]

LOST 100,000 IN FNMPRT TOLD THEY WERE A SAFE INVESTMENT. I HAVE NO CONFIDENCE IN INVESTING NOT EVEN A CD AT MY LOCAL BANK. DON'T CRY FOR ME PAULSON

JIM O'DONNELL

2008 Sep 14 09:25 PM

[JIMBO el GR...:]

just like that WE ELIMINATE DIVIDENDS ON FANNIE MAE PREFERREDS. AFTER BEING TOLD BY UBS FINANCIAL THAT IT WOULD BE A SAFE INVESTMENT.that was in JUNE 08
NEVER BEEN TO A CASINO AS I DON'T GAMBLE. MAYBE THE FUTURE INVESTORS WILL HAVE CONFIDENCE IN THE MARKETS. I SURELY DO NOT.

JIMBO el gringo

2008 Sep 14 09:33 PM

[TonyCinTX:]

I'm on the author's side. Capitalism encourages the whole spectrum of risky trades; some pay off and some lose. But the risk must be real! If you can count on the government to force taxpayers to foot the bill for the losses, why judge risk at all? This is what happened at FM&FM and throughout big corporate America. The result is not a free market at all, it is just free money for the penthouse suite of offices. The CEO's of FM&FM will get their parachutes funded at taxpayer expense.

As for whether the numbers appear on the balance sheets, who cares? Does anybody think the problem will be corrected for nothing? No. It is going to cost tens of billions at minimum, and that money is going to come from the only player with pockets so deep they have zero regard for profit and no concern for losses: The US Government. As long as they protect their cronies and retain power, and project the *image* of caring for the middle class while raiding our wallets they are golden.

We should have let nature take its course and let them collapse. Actually we never should have deregulated them in the first place! That is water over the dam, but the dam should be repaired and the Enron loophole closed.

And Jimbo, if you think you don't gamble, you should take a clear-eyed look at the current market, because with the current state of deregulation and law enforcement by the SEC and government in general, the US market is worse than any casino. At least in a casino they aren't allowed to tell blatant lies to you, cook the books, steal your money under false pretenses and then walk away with impunity. At least in a casino they play by the frikkin' RULES, the dealer can't help his buddy by arbitrarily declaring a pair of threes a full house, or a busted flush "close enough".

To me, these bailouts are proof of lies. If the bailout was a good idea, let Warren Buffett or Bill Gates or Steve Jobs do it, or any of the other thousands of billionaires. They don't step up because they aren't stupid, the bailouts are going to produce staggering losses that the government will never recover, it will just sweep them under the rug and declare they saved America while destroying it.

We should let these things fail, institute regulations to prevent similar irresponsible greed from happening again, and use taxpayer money to aid those driven into poverty and homelessness as a result. Financially speaking, the stupid, the irresponsible, the criminals liars and frauds must lose everything. Bailouts don't just fail to punish them, they reward them! That positive feedback creates ever more of the same, and will destroy the market altogether.

2008 Sep 15 08:51 AM

[Deb:]

On a Fannie-owned foreclosures, Seller terms need to include not only what they are offering now "Cash or Conventional," but the currently omitted mortgage types of FHA (typically needs 3% of Buyer's money or a gift) and VA (veterans benefits include being able to buy "zero-down.").
FHA and VA buyers need acceptable credit scores showing the borrower pays their bills, not just "blood-pressure and a 6-pack of Coca-Cola" (as in "sub-prime" mortgages of fame in the current crisis).
If the home needs repairs, then have in advance of offering "for sale" an FHA/VA approved inspector preview the property and write up a list of repairs and have some escrow arrangement from the repairs being included in the purchase price so the repairs can be made, from the escrow at the Buyer's expense (from approved-in-advance written estimates), once the buyer owns the home. (Funds released only after work completed by whichever contractor, etc. Not hard to manage...we do this on roof replacement for properties sold in the winter, for example).
This will allow more financially qualified Buyers to compete for purchasing the foreclosed Fannie owned properties and help keep the prices from dropping down to a level where the the majority of Buyers are investors (Most owner-occupied home-buyers do not have cash or first-time Buyers typically do not have 20% down). I have seen Fannie owned property without any repairs needed being offered only "Cash or Conventional" and rejecting an offer of FHA that netted them out notably more than their offered terms. They rejected the FHA and continued to offer "For Sale" at about 20% less. Go figure. (And let me throw in that their offer pre-review worksheet is idiotic. Poorly designed work-sheet results in good offers not even being looked at by Fannie, but are rejected by a "gate-keeper"). Knowing they were getting an offer within 24 to 48 hours, Fannie none-the-less (becasue it was on their "schedule" to do so, immediately sent a particular property over to "pre-auction" status, meaning the Buyer would need to pay an additional fee of 5%, called a "Buyer's Premium" on top of the offering price. This 5% fee is in addition to the real estate commission. (As you may have guessed that particaulr transaction didn't materialize and Fannie continued to offer the property "For Sale." Our future tax dollars at work!!!
Fannie doesn't have to make good decisions; the Gov't has told them they are too big to fail.

2008 Sep 15 10:08 AM

[unimpressed...:]

Until we hold the top management of all public companies responsible for the failure of their companies and prosecuting those who deserve it, nothing will change and irresponsible risk taking will dominate and destroy.

Additionally, politicians who are/were involved in the failures of these companies should, also be prosecuted for misusing their offices for personal gain.

Yeah, I know, we would have to build more prisons and courtrooms to accommodate all the miscreants that would surface. Remember, wherever big money exists, intense oversight is necessary. Accountability and responsibility must be paramount. And, when misbehavior occurs, punishment equivalent to the crime must be meted out without regard to political party, past accomplishments, popularity, stature, or position. Felons must go to prison and must have their ill-gotten gains confiscated.

Did we forget the Savings and Loan scandals? Or, are We the People too forgetful, forgiving or stupid?

2008 Sep 15 12:27 PM