Sunday, September 07, 2008

Big Brother Seizes Fannie and Freddie

Let's be blunt, this is a Soviet-style seizure of private businesses. Are we really to believe that both Fannie Mae and Freddy Mac went broke on the exact same weekend?
Federal officials unveiled an extraordinary takeover on Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, signaling the most dramatic move to date aimed at shoring up the nation's housing market.

The plan, which was delivered by Treasury Secretary Henry Paulson and James Lockhart, director of the Office of Federal Housing Enterprise, places the twin mortgage buyers into "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," Paulson said.

Both agencies will be open for business Monday morning. Dividends on both common and preferred shares will be eliminated in an effort to preserve capital.

The regulators also ousted Richard Syron and Daniel Mudd, chief executive of Freddie Mac and Fannie Mae, respectively. ...

Fannie and Freddie have become virtually the only source of funding for banks and other home lenders looking to make home loans. Their ability to do so is crucial to the recovery of the battered home market and the broader U.S. economy.

The two firms buy loans, attach a guarantee, then sell securities backed by the loans' income stream. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures.

Both companies have been losing money for the past few quarters due to the subprime mortgage meltdown and steep declines in housing prices.

Shares of both companies are down more than 80% so far this year.

The cost of the government intervention remains unclear. Experts argue that it will depend in large part on the structure of the rescue, the direction of home prices and mortgage default rates. Still it seems almost certain it will run into the billions and will most likely eclipse such other high-profile government bailouts including than the Federal Reserve's $29 billion backing of Bear Stearns assets when it was taken over by J.P. Morgan Chase.

Another unintended yet unavoidable consequence may be the impact to the nation's banks.

Some of the nation's largest financial institutions including JPMorgan Chase and Sovereign Bancorp own a big chunk of the estimated $36 billion in preferred shares of Fannie and Freddie, which are at risk of being wiped out should Fannie and Freddie end up getting a cash infusion from the Treasury Department.

19 comments:

  1. A monumental event.

    Let's be honest, this is a Soviet-style seizure of private businesses.

    Soviet style? Fannie Mae and Freddie Mac are not truly private businesses; that is the problem.

    Are we really to believe that both Fannie Mae and Freddie Mac went broke on the exact same weekend?

    No.

    Neither went broke (yet) but the rising cost of capital for both Fannie and Freddie showed a rapidly escalating lack of confidence in the capital markets.

    mad_tiger

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  2. Agreed - they werent broke and werent likely to be broke for years...(yet they would be broke long term). THis was done at this time as an attempt to bring stability to the market - no more no less. We shall see if it works or not...

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  3. Aww come on, this in a normal down turn. Every 3 years or so the government takes control of Fannie and Freddie. This is normal. Lance and VaInvestor said so.

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  4. robert said...
    "Aww come on, this in a normal down turn. Every 3 years or so the government takes control of Fannie and Freddie. This is normal. Lance and VaInvestor said so."

    As VA_Investor used to say, "normal cycle."

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  5. I guess the thing that I (and a lot of others, I would guess) don't know is what this really means in the end.

    And by this I mean, are there lots of investors all over the world holding these notes who are now going to have to write off a bunch of debt? If so, how much, and who is holding these notes, and what is their financial health?

    And is the U.S. Government going to have to print some more money to cover all of this, and what will that do to the dollar?

    I guess we will know the answer in the days, weeks, and months ahead...

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  6. Did anyone notice that Secretary Paulson griped about how fannie and freddie weren't driving interest rates low enough?

    His words, "As the GSEs have grappled with their difficulties, we've seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers."

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  7. We need to get the fact situation accurate.

    The USG has already guaranteed payment of the GSEs' debt. They are already effectively nationalized.

    No one has stated they went broke. Can there be any doubt, however, that if one was placed into conservatorship or nationalized, the other would have immediately suffered sale of its debt and stock that would have made it insolvent.

    Where were the regulators and Treasury when we needed them?

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  8. from CNN.com,

    "Sunday's federal takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit, experts said. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage."

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  9. As I've said all along, I don't like actions such as this "take over" but it's something that I and VaInvestor warned would happen. I.e., those who banked on a collapse (i.e., "doom and gloom") to allow them to buy, were wrong ... dead wrong. Whether you like what the feds do to protect the REIC or not, it's a known fact that it has happened over and over in every cycle. Remember Silverado? So, an buyer looking to make a wise decision, doesn't base his buying decisions on the expectation that "gloom and doom" will occur. It's not in the nation's interest to see things go that far ... Even if it means that those who deserved to fail don't because we, the taxpayers, are ultimately bailing them out. It's basically making one's decision based on what WILL happen around us (such as this bailout) and what SHOULD happen if we lived in a perfect world.

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  10. Myrtle beach rentalsSeptember 07, 2008 11:19 PM

    hmm...I agree - can we say 1 centralized government bank? what sucks is that I just ordered new checks

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  11. Lance said...
    It's basically making one's decision based on what WILL happen around us (such as this bailout) and what SHOULD happen if we lived in a perfect world.


    Unbelievable. No, strike that; comical.

    Now Lance, what type of action will the government perform to continue to prop up prices? It’s shown, proven even, that enough folks that purchased a home in the bubble years simply could not afford it. They can’t pay the loan back, if they could, there would be no need for a bail out.

    Lance you fail to acknowledge the problem, fail to see the problem, and are somehow able to assure yourself that this is “normal”.

    Bear with me Lance and please forgive me if it sounds too basic, but maybe we need to start here and work our way back to the beginning.

    When enough folks can’t pay their mortgage that you have lenders going under, banks failing, Fannie/Freddie failing; SHOULD this be happening? Is something awry? Is something off kilter? Has something happened in the last few years that caused things to run afoul?

    Ask yourself this question, and please post your answer so that we may ponder and contemplate.

    What happened? (we’ll get to the “what WILL happen” after you've answered that one)

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  12. "what type of action will the government perform to continue to prop up prices?"

    Huh?

    They just took over 2 companies and fired the board and CEO's because they didn't lower interest rates enough.

    Isn't it sinking in? The U.S. Treasury Secretary spelled it out. They want cheap money available to stimulate the housing market.

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  13. Anonymous said...
    Isn't it sinking in? The U.S. Treasury Secretary spelled it out. They want cheap money available to stimulate the housing market.


    Which will continue to devalue the dollar. So sure, cheap money to stimulate the market, but that cheap money buys less gasoline/food/sundry items.

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  14. You asked what they "will" do to prop up prices but now it seems you don't like what they "did" do.


    Hey Lance, check this Business Week article out.


    Washington, D.C./Va./Md. Metro Area

    Best-performing ZIP: Falls Church, Va. 22043
    Annual change in asking prices: +19%
    Median listing price: $673,918
    Days on the market: 99

    Worst-performing ZIP: Woodbridge, Va. 22191
    Annual change in asking prices: -49%
    Median listing price: $209,782
    Days on the market: 121


    Fascinating.

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  15. *It's basically making one's decision based on what WILL happen around us (such as this bailout) and not what SHOULD happen if we lived in a perfect world.

    (I forgot the 'not'.)

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  16. Robert asked:
    "When enough folks can’t pay their mortgage that you have lenders going under, banks failing, Fannie/Freddie failing; SHOULD this be happening? Is something awry? Is something off kilter? Has something happened in the last few years that caused things to run afoul?"

    You're failing to see the larger picture. I.e., that it makes no difference what "should" be happening. What matter is what is happening ... and that that is really no different from what has happened over and over again throughout our history. You want to focus on the bailouts, so let's focus on those. Did not the government help keep the economy in check after the excesses of the 20s? Did not the government help the economy through the severe housing shortage that occurred at the end of WWII? Did not the government step in and help the economy with the Savings and Loan debacle? Why would you be surprised that the government would come in and help the economy now? It's proven many times in the past that it is willing ... and able ... to do so. Actually, you could even argue that that is one of its main reasons for being.

    The long and short of it is like Va_Investor said over and over. Don't bank on a doom and gloom scenario to bring "blood in the streets" and make houses available for "pennies on the dollar". (To borrow 2 phrases often used by Bubble Heads.)

    Whether you think this should be happening or not is of no consequence. It has happened in the past .... and will happen again in the future. Someone looking to buy can rest assured that if they are really looking to buy (and not to just "flip") it, all will be well in the end. When all is said and done and they go to sell either that house (or one they've moved up to) some 10 or 20 or 30 years down the road, they'll be far better off both financially and otherwise, than had they not.

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  17. Robert said:
    "Which will continue to devalue the dollar. So sure, cheap money to stimulate the market, but that cheap money buys less gasoline/food/sundry items."

    So is my prediction (from long ago) about inflation sinking in?

    In short Robert, it's not about what should happen, it's all about what does happen.

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  18. The only thing that is true now is that under today's tighter lending standards lance doesn't make enough income to qualify for a mortgage to buy the S Street house he brays about.

    Were it not for exotic mortgage products offered to people with no hope of repaying what they borrowed, lance would still be in his Kalorama condo.

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  19. Lance said...
    You're failing to see the larger picture. I.e., that it makes no difference what "should" be happening. What matter is what is happening ...


    As I expected, semantics and diatribe right out of the gate.

    Lance, I did not ask “should”,”does” or “will” (We’ll get to that later).

    Why is it, in a “non-bubble”, “normal” real estate market, the Government is taking over F/F? What happened? (with your help, we’ll get to the “is” is, and “shouldawouldacoulda” too)

    Lance said...
    So is my prediction (from long ago) about inflation sinking in?


    Not quite. You predicted inflation with once again rising home values, and specifically said housing prices simply could not drop while food, fuel, etc rose.

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