U.S. seizes Fannie and Freddie

CNN ^ | 9/7/2008 | David Ellis

[CodeToad]

NEW YORK (CNNMoney.com) -- 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.

[Freedom_Is_Not_Free]

OK, that makes some sense. They have a lot of clout and I can see the possibility there. Thanks.

[BatGuano]

There was a post, to that effect, of July 20, 2008. An article from The Economist of 7/17/08. that describes the eventual plunge of the two Gov’t Agencies that have let us all down. Raines and Gorelick were two of many Clinton appointees who have enriched themselves.

Unbelievable banking practices are more like it in this case. Basically they have built a house of cards with derivatives and, with the slump in real estate values, we are in for a rough ride. Is it this President's fault? No, not entirely, he inherited crooks that should have been fired and he did not have a magic ball to tell him that or how and when the bubble would burst.

[Freedom_Is_Not_Free]

By the way, I’ve been under the belief that the higher mortgage rates were due to inflation fears, so I didn’t think FnF would impact the rates much in light of inflation fears. Any comment on that? Don’t the inflation fears still dominate the 10 year bond and mortgage rates, or am I missing something?

[Orange1998]

This you tube gives the scoop in laymen terms. http://www.youtube.com/watch?v=rWP787wq0rQ&feature=related

[javachip]

I don’t think the 10% on the gov’t super deluxe ultra preferred is a problem. The Treasury is only kicking $1 billion to each company for the super preferred, so FNM and FRE each just added $100 mil per year to their outgoing cash flow. But, they eliminated the dividend payment on all existing common and preferred stock.

Up until this weekend, Fannie was paying 20 cents per year per share of common on over a billion shares. That’s $200 mil of annual dividend payout that they won’t be making under this deal. And they won’t be making dividend payments on the existing preferred, don’t know how much that was. Bottom line - Fannie is now paying out substantially less than they were before. I didn’t check Freddie, but suspect it’s a similar situation.

[Freedom_Is_Not_Free]

As you would expect, approximations of upside-down home owners are all over the map. But yes, millions of homeowners are certainly upside-down.

Moody’s: 8.8 million are upside-down

http://calculatedrisk.blogspot.com/2008/02/moodys-88-million-homeowners-underwater.html

Goldman and Morgan: 10.5 million

http://poorbuthappy.com/yourthing/post/how-many-northamericans-are-upside-down-in-their-mortgages/

Bloomberg: 15 Million

Seeking Alpha: 14% of all 45 million homes = 6.3 Million

The numbers will get worse as home prices continue to go down. As yet, there is no bottom in sight.

[Freedom_Is_Not_Free]

Real estate has been a solid long term investment over the years, generally keeping ahead of inflation.

FWIW, $29,000 in 1974 is worth about $130,000 today based on inflation, although I am cynical enough to believe that all inflation calculators use the government’s “official” numbers and therefore under report actual inflation over that time. I’ll bet that $29,000 converts between $180,000 to $200,000 in actual experienced inflation, not the governments fudged numbers. But that is a whole different discussion.

Also, FWIW, Zillow shows that home on Jeanine worth $192,000.

[TruthConquers]

Yes, I got my heads up at this link:

http://www.nakedcapitalism.com/2008/09/bye-bye-banks-freddie-and-fannie.html

[aimhigh]

Can you elaborate on that? Link?

Here's a couple I've read:

http://www.amazon.com/tag/politics/forum?_encoding=UTF8&cdForum=Fx1S3QSZRUL93V8&cdThread=Tx3JQJ161HMTA1N

Here's another one:

http://www.nathanielturner.com/economyworkersandfinancialmarkets.htm

Someday I'll learn how to post real links.

[AndyJackson]

Basically they have built a house of cards with derivatives and, with the slump in real estate values, we are in for a rough ride

Actually the problem is that under the structure we have set up real estate values are determined by the amount of credit available to fund real estate. The unwinding of leverage is what is producing the collapse in real estate values which is causing further unwinding of leveraged debt and so on.

It started with a bunch of ivy leaguers on wall street and in the Fed thinking they were a lot smarter than everyone else and knew things that the rest of us didn't. As Ronaldus Magnus pointed out about liberals, they know a lot of things that just aren't so.

[elkfersupper]

Oh, great.

That will help.

Now it will take a month or more to see a rate or other scenario change that used to happen within minutes.

Now your taxes are going to support not only the home interest deduction, but past transgressions by "homebuyers" and the mortgage markets.

Saints preserve us.

[bruinbirdman]

"6117 Jeanine Drive"

An interesting exercise is to plug that address into Zillow.com and look at the history of sales.

Then look at an Orange County, CA example of my old homestead, where my family lived for 49 years. Bought in 1952 for $12K. Sold in 2000 for $185K. Look at the 10 year history. High value $559K, last sold for $355K. We're talking 3bdr, lb, 1100 sq ft.

This whole neighborhood became a Sec. 8 barrio. Believe me, none of those buyers were paying Schwarzennegar 9% state income tax.

yitbos

[CutePuppy]

What it means, in a nutshell, is that Pres. Bush is giving us a going-away present by effectively doing in and disposing of the untenable structure of two institutions that

a) had no reasons to be set up as GSEs in the first place, i.e. structured in a "Third Way" public-private "partnerships" advocated by New Democrats of DLC and Tony Blair in UK - because these partnerships' profits were great for "private" interests of management and preferred investors but the "corporate" debt was implicitly (ha!) guaranteed by the government / taxpayers.

b) were used by Democrats essentially as slush funds for "their people" (James Johnson, Franklin Raines, Jamie Gorelick, to name just most visible) and bad policy instruments by piling the debt into them and drawing profits in forms of dividends and salaries),

This shines the light on the danger of these structures for the taxpayers, which otherwise are masked by their "private" facade - profits are private for government-connected, risks and debt are public for everyone else - everyone gets to participate courtesy of government, unlike just the common shareholders in other companies.

Finally, now this implicit liability on [off-balance sheets of] governments' books that nobody paid attention to (similar to other obligations that government has but not officially in the "budget") will no longer be covert and cannot any longer be used by Democrats as unaccountable entry for their "unfunded mandates" for "community loan" programs etc. because the local banks and loan originators simply will no longer be able to pass the loans onto Fannie and Freddie without scrutiny.

This is a long overdue action of finally "divorcing" the "public", but unaccounted for [implicit, off-the books] debt from "private" profits, which will finally shine the light on loose standards and tighten the future loan requirements, which will now become accountable for by regulators / Congress, now in full public view instead of being farmed off to a "private" for-profit entity, which Democrats used the way they use government (like a slush fund and source of enrichment). Yes, there will be a pain, but it's already in process anyway, and liquidity will be granted to those who deserve it, as it should have been.

The Federal National Mortgage Association, or Fannie Mae, is a public company operating under federal charter. It is the US's #1 source for mortgage funding, financing one of every five home loans. The firm, like brother Freddie Mac, provides liquidity in the mortgage market by buying mortgages from lenders and packaging them for resale, transferring risk from lenders and allowing them to offer mortgages to those who may not otherwise qualify. As with its private-industry cohorts, the company was hit hard by the subprime mortgage crisis of 2007 and had to be rescued by the Federal Reserve.

The subprime mess not only effectively shut down the home-buying market, it also turned off Fannie Mae's revenue stream. The company suffered huge losses in 2007 and predicted the same for 2008, when the federal government stepped in. Its management team was reshuffled that year.

The company's position is controversial, with critics and competitors saying its federal charter gives it an unfair advantage in attracting investors and bulding market share.

The company is no stranger to bad news or bad press. In 2006 federal regulators hit Fannie Mae with a whopping $400 million fine. Investigators claimed that the company's former executives willfully overstated earnings by more than $10 billion -- and then tried to impede an investigation into the discrepancies -- in order to reap performance bonuses. CEO Daniel Mudd and chairman Stephen Ashley were brought to task by the Senate Banking Committee that June in regard to accounting misdeeds.

(Source: D&B)

[Thoreau]

That is idiocy. Stop pissing on me and telling me its raining. This is theft of the taxpayer and put into the pockets of the pigmen.

[CutePuppy]

This is theft of the taxpayer and put into the pockets of the pigmen.

Theft has already occurred before. The pigs had their turn at the trough. Most people will just now be seeing the result of that theft. That was exactly the gist of my post.

[palmer]

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions."

~~Alan Greenspan, May 2005

(hat tip to Travis McGree)

[palmer]

By the way, I've been under the belief that the higher mortgage rates were due to inflation fears,

Not really, the rates were dominated by risk. The rise in spreads of basically all debt, not just mortgage backed debt, against Treasuries is due to the perceived risk. The main reason rates are as low as they are now is that the Fed has traded about 1/2 its 800B supply of treasuries for toxic debt. That keeps the debt price up and the rates lower. This bailout now trades even more treasury debt for mortgage backed debt, this time it's on all of our portfolios, not just the Fed's.

It's hard for me to imagine how this can prevent the further popping of the R/E bubble. The treasury will be easier to negotiate refinancing with, so that will keep some distressed properties off the market. But there is still a huge overhang of unsold properties, plus a generous helping of undistressed property owners who will unload if they perceive the market to be ready for another leg down. They aren't going to be convinced to hold just because the government guarantees a mortgage for somebody.

The real tragedy in all this is the continuation of the dilution of the U.S. Treasury. Already there were not enough future taxes to pay for obligations and we've just made that situation much worse.

[TomasUSMC]

I hear its 200 billion more bucks. What is the total sofar? 600, 800 billion?

[polymuser]

What does this mean?

That those responsible for the mess walk away with profit and/or perks, and we pay for it. That a bunch of people should be whipped but won't be.

[illiac]

Unfortunately, your comments apply to all appraisers. There are quite a group that have itegrity.

Lumping all appraisers in the “bad” group is like saying any one who was in the military have committed crimes against mankind - which we both no full well is not true - just as it is not true for all appraisers.