Their stocks are tumbling, some experts question their solvency — these are ugly days for government-chartered lenders Fannie Mae and Freddie Mac.
But, seriously, would the government allow the only two companies buying loans to go under?
First, here’s a wrap of today’s news from Bloomberg:
Fannie Mae and Freddie Mac, the two biggest providers of financing for U.S. home loans, fell to the lowest levels in 17 years in New York trading after a former Federal Reserve president said the companies may need a government rescue.
Fannie Mae tumbled as much as 24 percent and Freddie Mac slumped as much as 34 percent in New York Stock Exchange composite trading after UBS AG analysts said in a report today that Freddie Mac’s decline creates “challenges” for the company’s plan to raise $5.5 billion.
Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don’t have enough capital to weather the worst housing slump since the Great Depression, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington- based company show, and may be negative next quarter, Poole said.
“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in the interview yesterday.
And the Wall Street Journal reports that Bush Administration officials have discussed what to do if either or both companies fail. Options range from nationalizing them to extending them credit.
But the Journal says the most likely scenario is government won’t have to get involved and that the companies will instead raise capital from private investors, much the way Washington Mutual and other companies have done. That dilutes the ownership of shareholders.
Stay tuned. This is one to watch.
Related News:
- Are Fannie and Freddie in danger?
- Fannie Mae’s big loss and the credit crunch
- Home equity delinquencies highest since 1997
- Foreclosure auction firms accused of “bait and switch”
- That didn’t take long
- O.C. foreclosures hit new record in May, break 1,000 in a month for first time
- Look who’s making subprime loans now
- Good credit, good job but still need mortgage aid? Maybe…
- Unlikely voice against mortgage bailouts
No way would the government allow Fannie/Freddie to go under. And “former” Fed Gov. William Poole knows more about the “solvency” of Fannie?Freddie than Henry Paulsen, Treasury Secretary does? I would hope not. Paulsen says there is no risk on insolvency…of course what WOULD he say? I just don’t see it. All this anti-Fannie/Freddie talk got going as a result of them POSSIBLY having to raise capital under new government accounting rules…rules that COULD be set aside just for them if necessary. I think it is all a lot of hot air personally…but assuming it isn’t, the government would HAVE to step in…or the whole American and world economic system would collapse. This would be a MUCH bigger deal than Bear or Lehman failing.
this is where things have gotten out of control. Lehman and Bear failing was simply because the ultra wealthy had made of their trillions on the transactions that went THRU those companies over the last several years…what was left was the filthy coffee filter after the delicious brew was poured out…
Fannie and Freddie failing would be systematic failure. The government does not have the right to allow that to fail. We the citizenry demand to have mortgages made available to us.
take the money that the overextended loonies owe, kick them out of the homes they took hostage and can not afford, figure out what they owe as a balance and have the gov fund that money as a debt to the loonies at 0%, payable over the rest of their lives in a reasonable payment plan.
this way it effects only ONE group…the loonies themselves.
we the people get no gov bill and we the people get to buy homes again at the foreclosed amounts.
help me here? too simple maybe? forest thru the trees here?
Where are Thoughtful(less), Truthiness, and Sighburrdood??? Perhaps they walked off a tall cliff? Or maybe the sheriff finally showed up at their door with a pink slip and a megaphone?
Mortgages are a new entitlement that we demand government to give us? Create a class of debt slaves to the state? You would feel more comfortable in Marin County, methinks.
Before Fannie and Freddie got rolling in the 70s, small local banks made loans that they kept to maturity in their portfolios. And borrowers on average paid less than they pay today in terms of spread over Treasuries. The demise of the GSEs would allow them to come back into the market.
Fannie and Freddie can withstand less than 1% portfolio losses, due to their extreme leverage, which by most reasonable measures they have already incurred. They are terminally ill.
A government bailout would seriously undermine the finances of the US government. The US government itself can fail if interest rates on Treasuries shoot up into the teens. The GSEs may be “too big to fail”, but they are also too big for the US government to rescue without committing suicide.
” Rattled Markets Suffer Early Slide
Stocks fell as the turmoil around Fannie Mae and Freddie Mac continued to send shockwaves through the financial sector. Oil prices surged back above $146 a barrel, undoing an early-week selloff that had soothed inflation fears. 9:39 a.m. “
Mark to market accounting rules only work if a market EXISTS. The current market value doesn’t mean the mortgages aren’t producing cash flows. So, it would make more sense to model asset values based on the projected cash flows and rates of default, instead of current market value, which can be arbitrary.
This is where the hedge funds have an advantage in the market right now. They can purchase mortgage assets dirt cheap because banks have to clear them off the books due to mark to market accounting. Hedgies don’t have to follow the same accounting rules, so they purchase the assets at “market value” and either collect the cash flows or repackage them in a way that they can be sold for full value. Meanwhile, the banks get hammered by Wallstreet for their mark to market writedowns and have to raise more capital to get their asset to debt ratios back up.
It’s really a sick game.