Quickfixonomics: Fannie Mae And Freddie Mac?

In yet another alarming move, the government just decided that Freddie Mac and Fannie Mae, the nation's two government sponsored mortgage companies, can be part of the 'quick fix' that will rescue the U.S. economy. These mortgage giants, which are operated as public companies yet lean heavily on the shoulders of the U.S. government and thus ultimately U.S. taxpayers as government-sponsored entities, are in deep trouble already. To include them in quickfixonomics would be an irresponsible act.

The fiscal stimulus package, announced yesterday, will further grow the power and influence of Fannie Mae and Freddie Mac. Currently these companies are allowed to buy conforming mortgages up to a value of $417,000 for a single-family home, and that number is set to increase to $625,500. They already own or guarantee approximately $4.9 trillion in U.S. mortgages or about one half of those outstanding. My calculator does not have enough zeros for me to figure out how much that could go up to with this new mandate.

But here's the problem: Fannie Mae and Freddie Mac are not in a strong financial position. Both agencies have for some time now been trying to figure out exactly what their balance sheets look like. Just last November "Freddie Mac posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments."

Fannie Mae, too, is in bad shape. Last December the company announced the need for a massive capital infusion, and said they would "sell $7 billion of preferred stock and cut its dividend 30 percent to short up its capital base through 2008 as the housing slump worsens."

Though I am not a Wall Street equity analyst gut tells me they are going to need a whole lot more before this crisis is over. Merrill Lynch, in an alarming piece of research, is predicting that housing prices will fall 30% over the next three years. Just how much capital would these two agencies need in that scenario? Again, I'm not sure my calculator goes that high.

I congratulate Treasury Secretary Paulson for trying to impose some legislation to increase the oversight of these organizations alongside this decision, but in his own words, "I got run down by the bipartisan steamroller....Republicans and Democrats were united on this." (NYT 1/25 pg A8, "More Risk of Fannie, Freddie?") A decision to move forward with this latest recommendation has huge financial implications consequences and I, for one, would like to see a lot more intelligent thinking on this before any more steamrolling takes place.

Though an increase in loan limits does make sense, it could be a disaster to push it through quickly. Fannie Mae and Freddie Mac, like Citibank, Merrill Lynch, and a whole bunch of others, are trying to clean up their balance sheets and raise capital. Once again, these agencies have $4.9 trillion in mortgages on their books and now the government -- in yet another quick reactionary move -- is going to open the floodgates so more assets can pour onto those stressed out balance sheets?

Everyone needs to calm down and take a deep breath. We did not get into this mess overnight, and we are not going to fix it so fast. Since it is now common wisdom that a big part of the problem was caused by over-inflated home prices, dumping more of them on the laps of Fannie Mae and Freddie Mac while they are already experiencing massive losses related to what they already own is irresponsible, in the SHORT TERM. Please let's listen to Secretary Paulson! Upping the loan limit makes sense, but only after it is determined that the two agencies can manage those assets responsibly under appropriate adult supervision.

Comments

[mmckinl]

It's very clear that more bad debt will be foisted off on Freddie and Fannie and that the taxpayers will have to foot the bill.

The Only solution now is to establish a Public Central Bank and use 'greenback" creation of money and credit. The Private Bankers at the privately owned and operated Federal Reserve who created this mess should be shown the door. Their debt based fractional banking will bring the world economy to it's knees.

Banks should be allowed to fail and the sane bankers will flourish under in the new era of a sustainable economy under a system that rewards stewardship not casino corporatism.

[robinhood1]

What can you say about a culture that puts a 28 year old dead movie actor its magazine covers and largely ignores the death of a former Budget Director?
We can only hope that if the limits for conforming loans are increased, appropriate regulatory oversight is part of the package. Right now, the current crop of political hacks in Washington are most interested in getting re-elected later this year. They need to look like they are doing something to help keep the nation out of a recession. When my tax rebate comes in a few months, I will gladly cash it. Every dollar is a friend.

[MadAppraiser]

American politicians are utilizing these two financial institutions to correct for the current, ubiquitous federal policy of corporate non-regulation. Historically, private American financial institutions that are given the freedom to define, and implement unregulated financial policies often result in disastrous outcomes for American citizens!

FannieMae (banks) and FreddieMac (thrifts) had recent accounting difficulties, but are actively involved in elevating the quality of the private lender mortgage package. These quasi-government institutions are secondary mortgage market giants that implement underwriti­ng/apprais­al guidelines, design residential/income appraisal forms, and purchase participating mortgage lender portfolios.

FannieMae and FreddieMac must constantly adapt to the evolving strategies of private mortgage industry marketing/program scams! Without these two secondary mortgage institutions American citizens would probably await another 1929 economic disaster with private banking and Wall Street institutions at the helm of the American mortgage industry!

[WIpatriot]

"Quickfixonomics"

I love it, Jacki!

[Spookcatcher]

Actually, the Mortgage amount being negotiated is going to be over $700,000! Having been a Real Estate Broker for over 21 years, this Mortgage Scam is another Bush ploy. It is designed to sweep Overpriced homes in under the carpet , away from troubled lenders and servicers and onto Fannie May and Freddie Mac, as a backdoor bailout. It is also the primary hidden agenda of stimulous package which is a political instrument for PURE PROPAGANDA! This "Stimulous" is to appease and diffusse public sentiment away from the Public's didain of Congress and the Senate, so to benefit the Incumbents up for election! It is the same as BUYING Voers. Great Advertising and sounding for regaining support for THE INCUMBENTS, give them talking points and sound bites for their re-elections. The Republicans Bush Banker Elitist's think tanks had this Big Mortgage Bailout in mind from the get go. It is designed to make everybody look good to the dumb public. The Stimulous Package is just the Vehicle they needed this "earmark" to piggyback onto. SCREW the Extended Unemployment and Food Stamps that all the economists agree would really help the working class, or even Tax cuts for small business owners, they have got to keep hiding the money they stole out of the banks and on Wall Street! It is extortion and hush money for the voters and a free ride to bailout the Banks and rich homeowners to dump or buy Houses on Government backed U.S Taxpayer risk.

[lynnn]

You are right when you said we did not get into this overnight. W/that said, how did we get into this. Greenspan, Regean, Bush, Clinton, Bush.... (uh yea thanks Clinton for ripping up New Deal legislation for a couple of fancy dinners!)

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

http://www.prospect.org/cs/articles?article=the_bubble_economy

One more thing, if anyone is facing Foreclosure, make the banks show the original title, they might not have it. In some states, no title, no house (for the bank).
http://www.nytimes.com/2007/11/15/business/15lend.html?_r=2&pagewanted=print&oref=slogin&oref=slogin

[CSE]

OK, it makes sense that since you worked for Paulson you have a unique position to make a good recommendation on his behalf.

But, when you write, "Since it is now common wisdom that a big part of the problem was caused by over-inflated home prices, dumping more of them on the laps of Fannie Mae and Freddie Mac while they are already experiencing massive losses related to what they already own is irresponsible, in the SHORT TERM", I begin to wonder.

[realitytrumpsbull]

I will never sign mortgage papers so long as I may live.