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.