Fannie, Freddie and Uncle Sam - America’s government should get out of the mortgage business
If the bubble bursts - "These institutions will collapse."
White House Warns of Increase in Debt, Risk Threat at Fannie Mae, Freddie Mac
The Wall Street Journal
By JOHN CONNOR
February 5, 2002
WASHINGTON -- The Bush administration said Fannie Mae and Freddie Mac have funded their rapidly growing asset portfolios by increasing their debt outstanding and warned that the two companies may be taking on more risk with subprime loans.
In its fiscal 2003 budget document, the administration said debt outstanding for the two government-sponsored enterprises, or GSEs, "rose from $518 billion at September 1997 to $1.26 trillion at the end of September 2001, an annualized growth rate of nearly 25% a year."
The administration's budget said the two companies, created by Congress to assist in housing, have been growing faster than the mortgage market in recent years. From September 1997 to September 2001, the mortgage asset portfolios of the two companies "increased 150% in dollar volume, and their guarantees of MBS [mortgage-backed securities] increased 40%," the budget said. Fannie Mae and Freddie Mac have funded the increase in their portfolios with more debt.
The budget said the credit quality of the loans Fannie Mae and Freddie Mac hold or guarantee "has benefited in recent years from strong housing markets that have improved collateral values." But it noted the companies are increasingly active purchasers of subprime loans that tend to be riskier than traditional mortgage purchases.
The Bush budget said increased guarantee volume and retained portfolios "imply increased credit and interest-rate exposure." It said the two firms have tried to limit their exposure using various risk-management techniques. But these tools, the administration said, "do not eliminate all the risk associated with funding long-term, mostly fixed-rate assets that have uncertain payment streams."
"Furthermore," the budget added, "the hedging transactions transform credit or interest-rate risk into counterparty risk [the risk that the counterparty of a hedging transaction fails to honor the contract]. Thus, the GSEs' management of counterparty risk is of increasing importance."
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THE MOUNTING CASE FOR PRIVATIZING FANNIE MAE AND FREDDIE MAC - (Free Republic)
THE MOUNTING CASE FOR PRIVATIZING FANNIE MAE AND FREDDIE MAC - December 29, 1997
"A related danger of the duopoly regime of Fannie Mae and Freddie Mac is that their huge size and market concentration would cause a severe disruption to the housing market if one of them were to fail. As a result those entities, as they are currently constituted, are perceived to be "too big to fail."(55) That means that in the event of a financial collapse of either or both of the GSEs, Congress could be persuaded to ill-advisedly "bail them out," as in the case of Chrysler, requiring loan guarantees or costing federal taxpayers billions in outlays. Fragmenting the market by introducing competition would reduce the likelihood of such a bailout by ensuring that no one company's failure would be viewed as disastrous."
Derivatives Risk Casts Long Shadow Over Freddie, Fannie
If the bubble bursts - "These institutions will collapse."
How Big Is the Government's Debt?
"When these obligations are combined with the debt held by the public, the total burden equals $33.1 trillion, or 10 times the official debt measure. This "total debt" is more than three times the size of the nation's total output in 2001, and amounts to $116,381 for every man, woman and child in America."