Our headline earlier this week: “You Had Better Watch Your Fannie (As Well As Freddie).” And we weren’t kidding. From Bloomberg this morning:

Fannie Mae tumbled as much as 20 percent and Freddie Mac slumped as much as 24 percent in New York Stock Exchange composite trading as concerns escalated that the biggest providers of financing for U.S. home loans don’t have enough capital to weather the worst housing slump since the Great Depression. The decline in Freddie Mac creates “challenges” for the company’s plans to raise $5.5 billion in capital, UBS analysts said in a report today.

Chances are increasing that the U.S. will bail out Fannie Mae and the smaller Freddie Mac, 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, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

And in response, U.S. Treasury Secretary Henry Paulson:

The Office of Federal Housing Enterprise Oversight “has made clear that [Fannie and Freddie] are adequately capitalized,” Paulson said in prepared testimony for the House Financial Services Committee.

Paulson said he is counting on Fannie Mae and Freddie Mac, which own or guarantee about half of the $12 trillion in home loans, to help revive the U.S. housing market.

Like they have since the Economic Stimulus Bill was signed into law five months ago?
Fannie, Freddie Tumble on Solvency Concerns, UBS Price Cut [Bloomberg]
Paulson Says Ofheo Assures Fannie, Freddie Capital Adequate [Bloomberg]
JustQuotes: You Had Better Watch Your Fannie (As Well As Freddie) [SocketSite]
If Lowering Rates Isn’t Working, Perhaps Increasing Limits Will [SocketSite]
JustQuotes: The Big (As In Jumbo) Difference Between Can And Are [SocketSite]

37 thoughts on “When We Wrote Watch Your Fannie, We Really Weren’t Kidding”
  1. “the worst housing slump since the Great Depression”
    But not San Francisco (except for District 10, and 9, and 3, and SOMA condos, and TICs everywhere, and homes that have not been completely remodeled, and Noe Valley homes without a garage . . .)

  2. Paulson: The Office of Federal Housing Enterprise Oversight “has made clear that [Fannie and Freddie] are adequately capitalized,”
    Translation: We aren’t going to bail out these sinking ships at this time.

  3. I count, what, six different posters mocking with various sarcastic paraprhasings in the last two or three days? awesome. 850 a foot for a 70 foot lot with no garage and 2 brs? Why, it’s the Great Depression all over again folks!
    man. reel it in, Socketsite. “real” it in.

  4. Paulson: The Office of Federal Housing Enterprise Oversight “has made clear that [Fannie and Freddie] are adequately capitalized,” Paulson said in prepared testimony for the House Financial Services Committee.
    Correct Translation: Don’t blame Treasury about “what might have been done” when the agencies go belly up… we only know what OFHEO tells us, and we (umm… conveniently) take them at their word.
    Currently, FNM & FRE equity has suffered substantial markdowns. But agency spreads have come in some.
    Markets are sniffing out a rerun of the Bear Stearns playbook on these beasts – equity is jettisoned but bondholders are backstopped through some Fed/Treasury scheme.
    Wildcard = Skittish public foreign holders of agency debt who starts a panic. You can bet the phone lines are active and open between the Fed and those holders, especially in Asia.
    Interesting times….

  5. I didn’t need a former fed official to tell me these two were insolvent.
    Of course, the US govt balance sheet is pretty poor too, but the cost of raising capital for the U.S. govt is still reasonable.
    And since the these two agencies are backstopped by the US Govt, does it really matter?
    If the S&L crisis taught us anything, it is that when faced with metltdown, the taxpayer and the US govt will bail out those who were only to willing to play with the moral hazard.
    The equity stakeholders in these two agencies are almost fully wiped out already, but the bondholders have to know they are safe.

  6. I have actually have done some consulting at Fannie Mae and based on my experience I would go with Poole.
    Fannie Mae is run in an almost incomprehensible incompetent manner and ALL of the employees, entry level to c-level, are overpaid and have benefit packages that would make workers in the EU jealous.
    These are bloated quasi government entities that act as if they are untouchable, unaccountable, and entitled to the obscene compensation packages they receive. Let them go down and starting from scratch maybe the only way to “reform” Fannie and Freddie and return them to serving home owners and not their own bloated sense of self importance.

  7. a possible fannie/freddie bailout? you don’t say. Nobody could have predicted this. (when did I start squawking about this, a year ago?)
    and who could possibly have thought that Fannie and Freddie would have balance sheet problems??? (despite the fact that they have barely produced any accurate financials for over a decade).
    and who could possibly have believed that loading Fannie/Freddie up with toxic garbage this year could have caused this? I mean, in retrospect it almost seems like maybe it wasn’t a good idea to raise Fannie/Freddie’s conforming limit, or to decrease their capital reserves… now that’s just crazy talk.
    But at least Paulson has told is that there’s no problem. Whew! Because that guy has really been accurate so far… Like when he told us it was all contained last year. He’s so smart. and even if he did think that we’d have to bail out F&F I’m sure he’d tell us, right? Because governmental officials stand up all the time and tell us that we will have to bail out private organizations using Billions/Trillions of dollars of money. He would never try to calm people and just say “don’t worry”. especially since it is an election year. That’s when politicians are especially honest. Yep. Accuracy and honesty. That’s Hank Paulson!

  8. Ex SF-er, in Paulson’s defense, he didn’t say that HE believes the organizations are well capitalized, he just said some OTHER guy said they were.
    Which means Paulson knows they are going down and he isn’t even willing to put what’s left of his credibility on the line here.
    This just gets worse and worse every day. How’s Obamma going to pay for his handouts if all the money is going into FM/FM to prop up the housing market. Tsk, tsk, decisions, decisions. The dems have all that money already spent in their heads: it will be hard to cough it up to FM/FM. It’s going to cost trillions! What to do?

  9. sorry about the snarky post. but this just irritates me to no end, and today my irritation is getting to me- All these people getting up and pretending that they didn’t know that this exact scenario was going to happen.
    The thing that irritates me more than anything (and I’ve said this before) is this:
    -a lot of the garbage that is in Fannie and Freddie was transferred there from other private organizations. Thus, Fannie and Freddie were used so that CEO’s of other banks/I-Banks/hedge funds could make a killing and huge CEO bonuses. Now Fannie/Freddie will take the fall and very few people will realize that it was OTHER corporations that should have failed instead (or in addition). those other CEOs will keep their millions (or billions) of dollars. And the taxpayer pays for it all. and this was COORDINATED to happen by many people. (The Prez and VP, Congress, OFHEO, Treasury, the NAHB and NAR lobby, the Fed, the big banks, and so on).
    Sure, the stockholders of Fannie/Freddie will get wiped out if they go BK. But the BONDHOLDERS will likely be made whole. This is also stupid… but there is no choice… F&F’s bondholders are places like foreign banks and Sovereign Wealth Funds, but also grandma’s pension.

  10. badlydrawnbear – great comment! I actually did some consulting too at the now-extinct Federal Home Loan Bank Board (remember the S&L debacle). Fannie is larger and more arrogant – but your comments apply to every single govt or quasi govt agency in DC. I agree that we taxpayers should just let them fail – the sooner, the better.

  11. Recent focus has been on “too big to fail.”
    Perhaps…just perhaps the imbeciles and crooked self-servers have created in Fannie a beast that is “too big to save.”
    The presumption is that the gubmint will somehow bring Fannie’s debt onto its books. Any difference between fundamental value and historical value will be squared by Congressional mandate and more federal reserve notes will be summoned from thin air and distributed to the debt-holding masses as said debt matures.
    Ergo, we’re in only the early innings of an inflationary era. That’s why all the institutional and HNW money is elbowing itself to pile into commodities.
    Just perhaps…..
    The very effort itself to save Fannie in this manner effectively destroys more credit-creation than it secures, and we don’t even get to the renewed-inflationary round. Creditors further increase standards and refuse to rollover, causing a dash-for-cash among levered firms & individuals. And unless you can operate with cash, you join the ranks of the threatened-insolvent.
    And as a continuing debtpocalypse gathers strength, wholesale credit-revulsion takes root of the sort our grandparents and great grandparents came to appreciate in the 1930s.
    As levered assets come to be understood for what they truly are in the absence of reliable appreciation or access to supporting credit: a ferocious liability.

  12. Call me cynical, but it was my understanding all along that Fannie and Freddie were taking over the bad loans from private entities specifically to consolidate losses in one place for the taxpayers to bail out.

  13. @kaya
    Not according to Rep. Barney Frank, who lead the charge to increase F&F loan limits so they could buy more toxic mortgages from private lenders.
    There is an email exchange over on the paper economy blog where Rep. Frank specifically challenges the claim that allowing F&F to take on more debt and lowering their capital levels will result in a bail out.
    I just hope all the talk shows bring Rep. Frank back on and challenge him on his claims.
    Because as ex-sfer pointed out. Plenty of “arm chair economists” say this coming from miles away.
    P.S. “to big to save.” – love it!

  14. Whether or not a bailout or intervention occurs is a foregone conclusion at this point, barely warranting elucidation. The question now becomes the format and scope.
    The GSEs are too large for outright nationalization, I think, so I totally agree with Debtpocalypse that solvency will likely be restored by backstopping bad loans with taxpayer (i.e. borrowed) money. May be a permutation of the TAF or something similar. I bet something is indeed already being drafted in the boardrooms of DC and NYC. In the meantime, we get “the worst is clearly behind us” from various sources because nobody wants to yell “Fire!” in a crowded theater.
    So…will there be any effect on Noe Valley prices if 30-year fixed mortgages go to 8%? 10%?

  15. I guess Cash is King and always will be.
    If you lend money that doesn’t exist yet (and will not for a very long time) you can overleverage to the sky (and cash out your hefty commissions) and hope the people who borrowed from you will come up with these overbloated mortgage.
    All that is now over and we are going back to earth. Whatever gimmickery the Fed has attempted is just delaying the day where we go back living in the real world:
    – People deposit money for x%
    – Other people borrow the same money for y%
    – The banker lives on the y-x%
    As simple as that. A house is a house, not a way to easy riches.

  16. I’m curious how this impacts SF RE. I understand that FM/FM buys loans, but so many of the loans made in SF were jumbo and not until recently being sold to FM/FM. The SF market seems to have run independent of the rest of the nation. The new sales in SF are well funded and still the prices remain relatively high compared to the rest of the nation. These loans are increasingly held by the issuing banks as there is no real secondary market for jumbos aside from FM/FM. Wonder how many have gone to FM/FM after they lifted the conforming loan limit to $729K.

  17. This just gets worse and worse every day. How’s Obamma going to pay for his handouts if all the money is going into FM/FM to prop up the housing market
    Yes, Bush and his minions have screwed the next President. Obama or McCain is going to have one hell of a mess to clean up.

  18. “The new sales in SF are well funded and still the prices remain relatively high compared to the rest of the nation. ”
    Don’t forget that “the city” is actually one small slice of a large urgan area. It would be like taking the western part of the westside of Los Angeles and saying that the market is still healthy, when for MOST Bay Areans there is currently a housing collapse. The geography of San Francisco may make it feel safe and secure from what is going on 15 miles east of the Ferry Building, but the most expensive areas are always the last to suffer during these downturns.
    I see the same thing happening with Newport Beach (market is still strong for homes above 5 million) compared to the rest of Orange County (which is now in free fall), and Indian Wells compared to the rest of the Palm Springs area.

  19. psst…
    nobody’s talking about this yet… but what about FHA?
    It is highly likely that the future govt plan to “save” housing will shift to FHA.
    And we are currently “modernizing” FHA. This means we are
    -dropping required downpayments
    -increasing loan allowances
    -loosening FHA guidelines.
    if this all goes through, I wonder what major “unforeseeable” surprise will happen going forward.

  20. I’m curious how this impacts SF RE
    nobody can say for sure. I would guess
    1) much higher rates. I won’t give an estimate because I have absolutely no idea how high they will need to go, but 8-10+% are not inconceivable. remember that rates have been as high as 18% in the past before
    2) much tighter lending. Going forward will likely need higher downpayments (20-30%?) and also lower debt to income ratio. (28% gross or 33% net income?)
    Most San Franciscans do not pay cash, they finance. so this will likely affect them. only a tiny segmant of Bay Areans can afford to pay for homes in cash.
    it’s difficult to predict however because it depends on how the government bails out F&F. The govt may decide to keep artificially low interest rates on mortgages (like through FHA as example). The problem is that this will exacerbate the problem of commodity prices etc…
    we are in trouble. Either let housing fall or try to bail it out and suffer further weakening of the dollar. As example: F&F bailout news comes out and we get an immediate spike in oil to a record high this morning.
    SF is highly dependent on the US economy.

  21. FNM and FRE are looking to open at about another 50% down this morning. You’re looking at just about a 100% certainty of the need for government intervention at this point.
    I really have no idea at all how this will affect interest rates. If ex SF-er’s prediction/guess comes about, that would really put a damper on things. For SF, the biggest impact I can see is a further tightening of lending requirements, at least for a while. I cannot see the government loosening standards back toward what got us into all this in the first place. The biggest driver in SF right now seems to be the fact that so many fewer would-be buyers can qualify for the large loans needed to buy in this city than was the case a year ago. Hence, the reductions in sales volume. That is likely to tighten even further, at least during a period of time while the FNM/FRE situation and how to deal with it gets sorted out.

  22. The Bush administration will move on Fannie & Freddie no later than over the weekend.
    Monday morning will not arrive and the markets will not open without some form of intervention having occured.

  23. 10:26 a.m.[FNM] Paulson: Supporting Fannie, Freddie in ‘current form’
    10:26 a.m.[FNM] Paulson: No bailout of Fannie, Freddie on horizon
    He’s bluffing.

  24. I believe this is the end of the independent mortgage broker. Gov’t steps in to bail out Fannie/Freddie and in the process imposes new regulation that eliminates the mortgage broker.

  25. Forgive my ignorance, but is there potential money to be made in a FreddieMac/FannieMae takeover – didn’t Bear Stearns dip to less than $5 a share and eventually the government sponsored buyout provided double that?

  26. Not ignorant, Jake. Fair question. Great fortunes are made during panics.
    And some fabulous interday money has been made by traders in FNM today.
    Low of the day is ~$7.00.
    Recently traded as high as ~$10.60
    You coulda made a 50% return in just over an hour.
    Assuming you possessed a crystal ball… and perhaps others made of steel.
    For any time horizon beyond 1 hour, however, I wouldn’t touch either of these agencies equity with even my enemy’s capital.

  27. Jake:
    there are trades here, but they are dangerous. I would not recommend them to anybody.
    First, to answer your question: It is impossible to do a bailout of F&F the same way that was done for Bear Stearns. For Bear, the Fed put up some cash as a pseudo-insurance policy so that another bank (JP Morgan) could take Bear over. THus, the stockholders were not wiped out. they did ok compared to how they would have done otherwise. the trade then was to buy Bear at $2-3 and then hope that you got a better bid by JP Morgan (which happened, they got $10).
    This is not really an option for F&F. There is no bank that can “take over” F&F (they are too large to take over by a bank). Thus, the “bailout” will be a different form. If a bailout occurs, it will likely come in terms of the Govt directly buying F&F’s stock, OR by nationalizion. Nationalization wipes the stock to zero. The Govt buying F&F stock is complicated and I have to admit that I don’t know how that would work.
    There are likely two trades that people are doing (have been doing)
    1) buy F&F bonds (not stock) at a discount. When they are taken over then they are as “good as treasuries” and they may be worth more than they are now.
    2) Short the longer duration Treasury market. it is very likely that no matter what “plan” is instituted that the gov’t will have to create more governmental bonds. More future bonds=more supply of bonds in the future. More future supply= lower future bond prices. Lower future bond prices=higher future bond yields. Higher govt bond prices in the future = lower worth of today’s bonds.
    3) short Fannie and Freddie anticipating that they go near to zero
    4) short other financials
    5) short insurance carriers
    5) go long gold
    6) go long oil
    the problem is that these trades should have been done earlier in the week.
    going forward from today one could consider (at some point):
    1) going long selected financials (as they hold mortgage bonds)
    2) going long insurance carriers (as they hold mortgage bonds)
    once the bailout happens you’ll get a pop in the above 2, and you sell immediately.
    I’m not sure I explained these things well. YOU SHOULD NOT GO OUT AND DO THIS> These trades can make you a ton, or they could wipe you out. Prepare to lose everything if you try these.
    Disclosure: I am making no moves in my portfolio based on today. As I’ve said on here before, I am short real estate, short financials, long gold, long silver, short the overall stock market.
    I have closed out my short Fannie/Freddie positions and I have closed out my long oil position today. I am mainly in cash sitting this out. I will be jumping in and out of oil at my whim but not now as I”m leaving town and can’t watch the market.
    I also almost never get in or out of a market when there is a huge story with govt involved. the outcome is unpredictable, there are a few people who will directly determine what happens. I wouldn’t trust my wealth to a few people (Paulson, Bernanke, James Lockhart, CEO’s of fannie etc).

  28. actually, I would like to repeat a mantra of mine. Don’t worry about making a ton of money right now. worry instead about keeping what you have and making sure you’re ok going forward.
    What this means to me:
    1. decrease your debt as much as possible. Now is not the time to go deep in debt. so pay down what you can, and don’t add.
    2. make sure you have an “emergency fund”. This should be at least 3-6 months of expenses in a LIQUID account. (not a HELOC or your 401k or IRA… but cash-equivalent in a savings or checking acct or in a safe or something).
    3. make sure your money is as safe as possible. As example, monitor to see if your bank is having financial difficulty. Spread your money in multiple banks, keeping your $$$ under the FDIC insured limit.
    4. Keep a little cash at home. Enough to get you through maybe a week of expenses, just in case.
    I will give you an example: when Northern Rock failed in Great Britain this year I had an acquaintance who could not access his money for a few days. he got it all back… but there were lines around the block and the cash machines didn’t work and his cash card didn’t work. So he was stuck without cash for a few days. he had his credit card… but there are a few areas where credit cards don’t work.
    again, this isn’t dooms day stuff… just general financial advice. Prepare for badness. If it doesn’t come than the above advice certainly isn’t going to harm you. it should be done during boom times too!

  29. For anyone interested, I believe the Euro is gonna pop over 1.60 pretty soon. The prospect of the Fed adding the FNM and FRE mortgages to the national debt (and doubling it) is not helping the greenback.

  30. Treasury to the rescue…..
    Paulson Statement on Freddie Mac, Fannie Mae: Full Text
    July 13 (Bloomberg) — Following is the text of a statement issued today by Treasury Secretary Henry Paulson:
    Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.
    GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
    First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
    Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
    Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.
    I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

  31. So, my taxes will be used to support the foolish investment of financial institutions around the world, so that said investors can go to bed feeling ‘confident’ … Just lovely!

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