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Aside from the idiots in Congress who are hell-bent on plunging the country into a currency crisis so they can blame the other party for it, I totally fail to see why a bailout which preserves the companies is at all required. If they companies are under capitalized, their oversight department should take them over and wind down their operations, and they should go away, as simple as that. It's not like you can't charter new GSE's once these have finished aptly demonstrating that the old rules, which allowed them to operate like massive hedge funds, were totally inadequate.

Let them fail, Congress; please, think of the people you supposedly serve. We deserve a currency with value and a market which functions with risk pricing. We want affordable housing, not more wealth redistribution from the savers to the reckless leveraged speculators.

SD Scientist left this response to CA renter's question:

Where are you getting the $10B number?

"Total interest payments on Fannie and Freddie bonds, combined, are approximately $80B/year. (E.g. see Freddie Mac's annual report, page 36) Normally they collect more money in mortgage payments than they spend on bonds.

Unlike Countrywide and IndyMac, GSEs have solid portfolios, their delinquency rates are on the order of 1%.

Worst case scenario, if GSE delinquency rates go up to 10% and they don't recover ANY money through foreclosures, they'd require government infusions of $8 billion/year to function.

That's why I'm baffled by all this talk about GSE's being "insolvent" because their net paper asset value is supposedly negative."

SD Scientist runs his own blog charting the SD housing index - check it out below:

Link to Blog

SD Scientist, would you mind if I copied a chart or two and put them on display here?

I think Rob Dawg's understanding of FNM and FRE is inaccurate. The government will eventually get involved with these two companies but it won't be as simple as he posits since these two do hold a mountain of risk.

If you look at the assets that these companies hold, it is pretty ugly. FNM owns ~$725 billion worth of mortgages. This includes $215b of interest only, $268b with LTV > 90%, and $25b worth of subprime RMBS. Fannie has about $43 billion equity to back up these loans its bought with borrowed money. That's a little more than 16:1 leverage. And since they are leveraged greater than 16 to 1, it only takes a ~7%+ net decline in the value of their holdings to wipe them out completely.

In addition, FNM provides a principal guarantee to another $2.25 trillion worth of mortgage securities off balance sheet for the packaged loans in the securities it sold. FRE guarantees about the same amount.

FNM and FRE used borrowed money to buy mortgages one by one, package them, and sell a security based on the packaged loans off to investors. FNM and FRE borrow at AAA credit rates to buy mortgage loans that pay them a higher interest. Next, they sell the mortgage securities at a rate below the average loan rate paid by the pool of borrowers. That spread is to compensate FNM and FRE for continuing to hold the risk of default on each loan. So when the borrowers don't pay, it is FNM and FRE's problem. They did not sell off all the risk. They sold a security backed by a pool of loans at lower interest and retained the risk on each individual loan.

For now, the politicians are saying all the right things, "FNM and FRE are adequately capitalized," etc. But a bailout/restructure/capital infusion /something will be required within months. It is unlikely this will be good for home prices long term (or tax rates, or value of the dollar, etc).

FuturesWatcher,

Good post. We'll know a lot more tomorrow. The possibilities you raise have been digested in the minds of investors this weekend. I think it's likely that world markets will get absolutely decimated if the Freddie's debt offering doesn't go well tomorrow. The entire world (sovereign funds and all) has skin in this game.

FNM owns ~$725 billion worth of mortgages. This includes $215b of interest only, $268b with LTV > 90%, and $25b worth of subprime RMBS.

I think you'll find that they service that much in mortgage holdings but the retained portion is a small fraction. It is the bond holders who own the bulk of the debt.

I want a reverse dutch auction financed by a preferred stock scheme. The federal govt buys back all the bonds previously let to generate mortgages becoming the sole holder of all these mortgages right up until they get to say 80¢ on the dollar. If the rest are comfortable being second in line behind stockholders for loses then fine they can be the front line 20% willing to take the risk. Don't like it? Take the 60-80¢ and run.

That didn't come out clearly. Yes, the retained portion is $725b but it is a small portion of the entirety that they service. That is their business and between servicing fees and mortgage origination fees they are/were able to cover the growing loses in their retained exposure. Now that they are about to be Federalized wrt loses the rest of us will pay twice to cover bond holders who supposedly knew what they were doing.

Rob Dawg,

I believe FNM services (and guarantees) ~ $2.25 trillion worth of mortgages total. Similar amount for FRE too. These $4.5B are held off balance sheet.

FNM and FRE do guarantee the the principal on the mortgages that they securitize into MBS. FNM and FRE hold the risk, not the MBS security holders who bought from FNM or FRE. Preferred and common FNM and FRE shareholders have risk, but owners of the securitized mortgages do have a guarantee from FNM and FRE. That's where the big problem is.

See excerpts from these links for notes about what they actually guarantee:

Link to article

"Fannie and Freddie own or guarantee $5 trillion of debt, close to half of all U.S. mortgages. ".

Link to WaPo article

Joshua Rosner, a mortgage specialist with Graham Fisher, who is advising the Treasury, said he does not expect the government to try to take over the enterprises ...

Instead, he expects the government to restructure the agencies, help them liquidate their bad debts and continue to guarantee payment on about $3.5 trillion of mortgage backed securities by opening up a line of credit totalling between $500 billion and $1 trillion.

--

Looks like the government will print a couple billion more this weekend to hand over to these two at 2.25%. Time will tell if this helps the housing market, but it won't help the dollar.

FuturesWatcher,
What is the NPV of a 30 year progressive repayment of a loan at 0%. That's not much of a guarantee.

FuturesWatcher,

You might be eventually right but the dollar is rallying oversees on the FNM news.

The ironic part of this is that everyone is/was looking to these 2 GSEs to stabilize the market. But it turns out they were just as irresponsible with leverage the last 5 years as the speculators who used little or no money down.

So the GSEs are even more mortgaged than the homeowners they are supposed to help and they need a bail out too. Who's next in line to get bailed out and who is going to pay the bill ?

ps - Bernie, Rob Dawg and all, I apologize for slanting this topic into a Yahoo stock message board so I won't post more on the subject.

The key takeaways in my mind are that 1) the depth of issues at FNM and FRE may be worse than first thought so it might be difficult to expect that they can just keeping buying more and higher priced loans indefinitely under current conditions 2) The gvt has to do something (and already started this weekend) 3) Expect lots more volatility around housing and dollar related investments as this unfolds

As Rob Dawg points out, nobody is going to have shell out $4 trillion tomorrow. But it is really hard to predict how long it will take for FNM and FRE to stabilize and whether that will be a net postive or negative for housing overall.

"Instead of walking away, more homeowners would stay in their homes if they could lower their balance and get a new payment. "

I don't get it. I want a Ferrari 599, if some idiot gives me a loan and I get it can I whine that I can't really afford it until everybody just agrees that I should get to keep for what I can afford to pay?

Hell no.

would you mind if I copied a chart or two and put them on display here?

No, I don't mind.

BTW my earlier post was done in a hurry so it's a bit disconnected. My point is, I think that FRE and FNM are STILL cash flow positive. I don't see a pressing need for a bailout. Also, even if it arises, taxpayers would be on the hook for the amount that's far far less than the circulated $5 trillion figure. That would only apply if all US homeowners were to stop paying their mortgages simultaneously. Short of a nuclear war, I don't see how that could happen.

SD Scientist,

Thanks for your response (and to Jim for posting it).

IMO, there are two issues here:

1. The debt the GSEs currently hold and guarantee.

2. New debt moving forward.

-------------------------
It's possible that anywhere from 10-20% of the GSEs current holdings/guarantees are not collateraized (underwater). Even if they were fairly prudent, the behavior of the other lenders forced them to make loans on over-valued collateral. The govt seems hell-bent on forcing them to take on even greater risk with lower down payment requirements and looser standards...at the very time these investments are becoming more risky.

Anyone looking to buy GSE debt right now has to be concerned about the future movement of the collateral prices, existing weakness of the GSEs (even if they're bailed out), and the future of interest rates (especially if they get bailed out, as inflation would rise and interest rates should rise as well). Will there be as many *future* buyers of GSE debt at current rates? If we see a dearth of new debt investors, that would cause further deterioration of the existing debt and collateral prices. Basically, a negatively reinforcing spiral down... No?

The FED Reserve is NOT the government. It is a private company made up of powerful investment bankers. Most people are totally ingonrant of this fact.

The FED deliberately creates economic crises in order to gain more control and power over the financial system. Everytime one of these major problems occur, they ask the Congress for "special authority" to deal with them. Of course their "special authority" never wanes. With each new problem, they gain more and more control over... us. They've been doing this since 1913.

Again and again we see ignorant claiming that Fed creates crises, for those, any of you care to explain root cause of the following financial panics:

http://en.wikipedia.org/wiki/Panic_of_1857
http://en.wikipedia.org/wiki/Panic_of_1873
http://en.wikipedia.org/wiki/Panic_of_1893
http://en.wikipedia.org/wiki/Panic_of_1907

Surely Fed wasn't the cause as it didn't exist back then.

Here is a novel idea: financial crises are natural for capitalist system as fragile equilibrium between two powerful human emotions, namely greed and fear does not last, instead system based on those two oscillates widely as both of them have powerful herd effect. There is no conspiracy, this will continue as long as human nature doesn't change. And if you want change start with yourself.

The Fed did not _invent_ financial crises, but then this is a caricature of the criticism. Everything has a consequence. One problem with central banks is that it convinces others to behave _more_ foolishly than they would otherwise (moral hazard). Another problem is that, while it may smooth the small bumps in the road, it makes the big ones bigger. This effect is common to lots of human efforts. Levees make flooding less likely, but they also make bad floods catastrophic. Choose your poison. My understanding of what most critics may be saying is that the Fed (particularly under Greenspan) may have convinced itself that it had licked business cycles, to the point that it began to try to smooth every little bump in the road, ultimately just making for a worse crash we are now experiencing.

A separate issue is mandate. The dual objectives of the Fed are not really compatible. We see today that Bernanke's policies are allowing a decline in the currency in favor of efforts at combatting housing deflation/unemployment. It is anyone's guess what is the "right" balance, but clearly the currency has no staunch advocate in this situation, which is why central banks were invented. Contrast this with Euroland. And of course, "saving" homeowners is being done with the savings of many people who did not behave foolishly.

I agree with gook and SD Scientists postings above. Today's sale of FannieMae bonds was oversubscribed. I think Paulson earned his paycheck this weekend. No government take-over.

As a side topic the whole issue of a government bail-out and taxpayers shouldering the burden for a bail-out of greedy speculators is a bit absurd. The Iraq War has now cost us $1 TRILLION, ($1,000,000,000,000). That's from the Congressional Budget Office. Or, 1,000 billion. The current mortgage mess is a drop in the bucket in comparison.

Today's sale of FannieMae bonds was oversubscribed.
A purchase at gunpoint is a market transaction?

Rob Dawg- call it what you will. Were you disappointed that the bond sale was a success? In any case your analysis and prediction were creative, practical and bold.

Mozart,
Since Iraq wants us to leave, maybe they can credit our account for that $1Trillion. Heck, I'd settle for 10 cents on the dollar. What a clusterf*&^ of a war.

Mozart, thanks. I am actually pleased the auction succeeded because failure after all the back room arm twisting would have been calamitous. There's nothing wrong with buying a little time to clear away the falsehoods swirling everywhere. Thing is, do not mistake today's 50% oversubscription as being a market signal. Market signal? Look to the TED spread.

Lending confidence at banks dropped to the lowest level since May 1 on revived concern credit losses will deepen. The so-called TED spread, the difference between what the U.S. government and banks pay to borrow in dollars for three months, was 1.34 percentage points.

That from Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=am7uRQ_g4oSk&refer=home

Here's an article from 2006 that explains some if the issues with Fannie Mae & Freddie Mac:

http://www.financialsense.com/fsu/editorials/baker/2006/0131.html

Just posting this FYI, for those who have brokerage accounts and want to brush up on the SIPC insurance (this is NOT the same as FDIC, as it is private):

http://www.sipc.org/how/brochure.cfm