Sean Olender

The SEC Panics

Felix is right on here. So is Ackman. Fannie and Freddie are certainly insolvent. The reason it doesn't appear so is that their write downs bear little rational relationship to what they are actually holding. Fannie and Freddie did wade into the toxic subprime and Alt-A pools and they are an abomination because their executives get paid like hedge fund managers and their shareholders (till recently) made out very well and this is all with some vague implicit taxpayer backing, but without the taxpayer getting anything in return for it.

Fannie and Freddie ARE the US mortgage market and the US mortgage market is secured by real estate that peak to trough is going to fall 30% or more. I'd say that will put Fannie and Freddie ultimately underwater by $1 trillion or so. It won't look like that now, but how about when nobody can buy a house without 20% down (or even 30% down) and everyone suddenly learns that only 15% of Americans can afford to do that? That realization will send prices down another leg for sure.

I think that if Fannie and Freddie's shareholders want to speak up about their right as investors in a capitalist system to not be jerked around, then that right should be respected and Congress should pass a resolution very clearly stating that there is no federal backing for either entity other than the paltry $2.25 billion credit line each has with the US Treasury. That's it. Period.

The problem is that implicit promise (to socialize losses by backing them with taxpayer money) combined with ridiculously weak regulation and huge potential gains for investors and managers creates a perverse incentive for management to take big risks right now - HUGE risks. If they win, everybody makes out great. If they lose, the Feds come in and make sure bond holders don't lose anything. I wish the US Treasury would back me in my business decisions like that with taxpayer money.

Fannie and Freddie have hurt the US housing market for 30 years by pushing up prices. They've not made housing more affordable. They've made it far less affordable by working with a coterie of corrupt banks, real estate agents and appraisers to push up prices as high as possible to expand their lending as widely as possible because it's how they make money. If it weren't for Fannie and Freddie, home prices would probably be 30% lower than they are right now and that means that 90% of Americans would need mortgages 30% smaller than they need right now.

The key is less lending not more. Lower prices make houses more affordable. Bigger loans do not make houses more affordable. Bigger loans make houses more expensive and hence less affordable. Banks will always claim lending makes things more affordable and the sellers who work with banks (whether the real estate industrial complex, universities in student lending, or any seller) will claim that loans make the product more affordable. But the racket is that sellers and lenders work together to push up prices because they both benefit from higher prices.