Fannie, Freddie to Buy More Bad Loans
Via the IHT (Paulson saying he would consider allowing Fannie Mae, Freddie Mac to buy larger mortgages) and Bloomberg (Fannie Mae, Freddie Mac Regulator Eases Asset Limits), regulatory limits on the two GSEs will be relaxed, in order to allow them to buy, in aggregate, $36 billion of mortgage-backed securities containing "jumbo" loans --- those over the "confirming" limit of $417,000. The changes will not go into effect until companies have cleaned up their ongoing accounting messes and are able to file quarterly financial statements. The increase represents a 2% growth in the two entities' loan portfolios. Fannie had requested a 10% increase, while some members of congress proposed a 5%.
The GSEs are financial institutions who purchase mortgage-backed securities and then either issue offsetting bonds with a form of credit insurance attached, or hold the securities in their own portfolio. They are quasi-governmental, quasi-private entities. They are subject to more lenient capital requirements, their securities receive special treatment in certain bank capital regulations, and their debt is possibly underwritten by the US government, though this is not entirely clear. These lowered their cost of funding compared to other private sector financial institutions and have enabled them to take on more leverage.
Doug Noland, who has been reporting on the GSEs for several years in his weekly Credit Bubble Bulletin believes that the GSEs were instrumental in getting the mortgage finance bubble off the ground. But as they have both run into accounting scandals in recent years (http://en.wikipedia.org/wiki/Fannie_mae#Accounting_scandal, Freddie), their ability to accumulate more portfolio assets has been limited.
In sum, the recent changes don't appear to have much impact due to their small size of these entities. The story is worth watching, though, since the GSEs are a likely focus of any larger bailout plans that may be in the works to rescue the holders of defaulted or impaired mortgage-backed securities.
Comments (5)
Yancey Ward
If I held shares in either one, I would dump them tomorrow. We are edging close to a requirement that they put capital into these loans.
Wish I could do the same with my "stock" in the US Treasury.
Published: September 23, 2007 9:04 PM
eric lansing
here's a question for the peanut gallery:
if Fannie goes belly up, does the US gov't (ie me & you) pay on FM bonds, or do we tell the Chinese, Japanese, everybodyelseholdingFMbonds they should have read the prospectus before sending money? ie the US gov't is under ZERO moral obligation to pay on FM bonds. If the gov't pays on FM bonds, the entire US balance sheet is impacted in a way that will increase treasury rates for all the gov't's "real" obligations. If the gov't pays on FM bonds, they, in effect, screw the existing legitimate interesets of T-bond holders who have done nothing wrong. That's not fair.
by the way, I recommend "The Coming Crash in the Housing Market" by John R Talbott (former Goldman Sachs VP)
Published: September 24, 2007 8:02 AM
million
what's the roadblock to spinning the GSEs off? they behave and pay their executives like private co's, spin em full private already - no more of this quasi-b.s.
Published: September 24, 2007 12:24 PM
DickF
The changes will not go into effect until companies have cleaned up their ongoing accounting messes and are able to file quarterly financial statements.
This comment saves the day. Freddie and Fannie haven't filled timely financial statements since they came into existence. We are saved by their incompetence.
Published: September 24, 2007 4:18 PM
Robert Blumen
"what's the roadblock to spinning the GSEs off? they behave and pay their executives like private co's, spin em full private already - no more of this quasi-b.s."
I see the real problem to privatizing them as their economically irrational capital structure. Their entire portfolio including their insurance obligations on the bonds that they issue is based on an artificially low cost of capital because of the implicit subsidy and regulatory favoritism. If they were privatized they would be more or less immediately insolvent.
Published: September 24, 2007 9:18 PM