Federal Regulators Order Freddie Mac to Replace CEO

The Washington Post ^ | August 22, 2003 | Kathleen Day

[AdamSelene235]

Homebuilders are running on air. When the GSE's go over the side, so will the homewreckers.

Unfortunately, this is likely to be cotemporaneous with the GSE melt. I'm trying to figure out a probable sequence of events so I can amplify my profits from the previous stage.

[lelio]

Thank you for posting the technical aspects of this. I'm learning alot.

1.5% rate change in less than 60 days is a move beyond spreads/margins these guys play with.

How does the fluctuation hurt them? I take it they have to lock into a rate to get their money from somewhere, but so what if that rate is lower or higher than one in 60 days? They're still making money on the difference.

Unless they're buying some sort of insurance (a collar?) on the fluctations of those rates. I can see them getting hurt then.

[imawit]

Dunno right now.

Levitator the competition for Viagra could be a shoot the whole wad play. I understand Bayer is the pharmaceutical.

[dix]

Your point is well taken, and I fully understand the economics of the real estate industry. My apologies, because my remarks were unclear. I was referring to the corruption by crooked mortgage brokers, and loosey goosey programs like DPAPs, or down payment assistance programs that allow sellers mainly developers to make down payments, and contribute the buyer’s closing costs. The sales prices, and the appraisals are then inflated, and the difference between actual value, and the inflated sales price goes back to the sellers./developers.

Programs like this can be a valid means for people to become homeowners, but the problem is you can imagine who they are targeted at. They are mostly unqualified buyers who get inflated credit scores based on factors that have nothing to do with their credit worthiness. As a result the default percentages go up, and real estate values are affected.

BTW gig’um aggies.

[imawit]

Glad to help, a kind word will get you everything. You've actually answered all of your questions in your post. The only item that is keeping you off of the complete answer is ...

They're still making money on the difference.

This is true of the pure speculators/investors but not Fannie & Freddie. As you stated they get the money to come up with a new mtg with short term money at a given rate. They then payoff the old mtg with a new one. They then have to pool all of these new mtgs and come with with a security instrument which represents this pool. Let's say $10 billion that has an aggragate of 6% return. Then they have to sell this $10 billion pool that is earning 6%. Herein lies the problem.

These are 30yr instruments that have a fixed return yet they don't. Not every mtg in this pool will go full term and therefore 6% earnings over 30yrs is not a given. Fannnie & Freddie are going to have to do several things which requires them to get new cash instantly. First is, they are a corporation with employees and operating costs. Second and most important, the short term money they used to create these 30yrs must be quickly pooled, securitized and sold. If they do this successfully they can earn a small amount on the spread.

Two things get in the way of this. One, these are 30yr mtgs and must be serviced at least for 3yrs (looking at the actuaries of mtgs), that costs money. Presently the BIG BIG crunch is that the cost of money has gone up better than 1% in 60 days. Therefore their cost in putting together new mtgs with short term money has gone up. And, their 6% pool of mtgs is really getting squeezed because the 30yr treasury (its competition) is squeezing it because they have to sell it at 4% and keep 1% for their operating expenses and keep another 1% to pay for the servicing of the mtg itself.

So, if they have to sell these new mtgs (pools) at 6% because of market demand, they are in the hole 2% (these are all theoretical numbers but they do reflect exactly what's going on). They needed to sell them at 4% and pocket 2%

Would you buy stock in a company that has only 2% of the value of these pools sold in assets that has Trillions in securitized pools when this company must have a spread of say 2% in short term rates in order to pay expenses and continue in business. You certainly would not want anyone to look at your books to find out what schenanigans you're playing in order to keep this looking good. And, there are those who are beginning to LOOK.

Overall, they get entities (central banks, insurance companies, pensions) to buy these securitized pools (this is not their stock) and then they have to pay the interest. I don't know if they actually pay out the interest or just ledger it but the value of the pool + interest earned is due some time in the future and they may not be making enough moola to keep the doors open nor service the mtgs. Obviously all wheels have to be kept going at 65 mph or there is going to be a very big problem.

That problem has arrived in the form of the Godzilla of instant higher interest rates of money and your securitized pools have degraded to say 4% margin (your margin after expenses) in a 6% world. This can be worked out of but the tool to work it out, new mtgs has slowed down. Your pools have increased in size by TRILLIONS with this lower rate and who wants a new mtg at 7% when they have one at less than 6%.

Just as scary if not more so, the hedging is not even being addressed.

WARNING ! DO NOT GO LONG FNM or FRE !

[AdamSelene235]

FRE

Let's see, the second CEO this year gets canned and the stock pops 4%.

This is totally bogus.

I don't want to believe in the PPT.

I don't want to believe in the PPT.

I don't want to believe in the PPT.

I don't want to believe in the PPT.

[imawit]

Head fake. This play could backfire. If you weren't short already, this was the grand opportunity.

[AdamSelene235]

Short? I put the short money in puts!!

[arete]

This is totally bogus.

Looks to me like da boyz are trying to scare out the weak shorts and ignite a short covering rally while they unload. It won't last -- just long enough to raise your blood pressure a little.

Richard W.

[AdamSelene235]

I'm still very much in the black.

But this is ridiculous. The news is bad...The market is down.

This is total BS.

[arete]

This is total BS.

Of course it is but the only way the big guys can get out it to beat the bushes for buyers. They prime the pump and then sell into it. Same old game. Be patient.

Richard W.