'Freddie (Mac) is a disaster'

Good morning. One of the more common hopes for a quasi-public bailout of the mortgage market is for Congress and the White House to pass legislation giving Fannie Mae and Freddie Mac -- the for-profit, government-sponsored buyers and guarantors of mortgages -- an even bigger role in the mortgage market. Let Freddie and Fannie buy more mortgages, and let them buy the big ones -- Jumbos -- is a common refrain.

Those hopes took a body blow* this morning when Freddie Mac shocked Wall Street, reporting a $2 billion loss and warning that "it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments."

Fallout: Freddie shares fell 29% this morning; one analyst told CNBC's Diana Olick, "Freddie is a disaster." Another analyst, Howard Shapiro, wrote, "... it will mean, in our opinion, a further exacerbation of the housing downturn — even less credit available and steeper downturns in home prices."

Further fallout: Shares of Countrywide Financial -- which relies heavily on Freddie and Fannie to purchase its loans, and has been lobbying for an expanded role for Freddie and Fannie -- fell to new lows, dropping below $10 per share.

Commentary: It may still be premature to ask whether there is an implied government guarantee of Fannie and Freddie, but I believe it is a good question for presidential candidates: Investors believe the government will bail these companies out if they run into trouble: is that true?

*Updated Commentary: I wrote earlier today that hopes for a bigger role for Fannie and Freddie would likely be hurt by Freddie's dismal performance. I've been listening to CNBC today and numerous commentators believe the opposite is true: that Freddie's troubles will spur Congress to loosen regulations, perhaps freeing Freddie and Fannie to buy more mortgages, even though their performance at the moment is shaky.

Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.

Comments

[Brother Joe]

Nobody seems to mention the "Wage-Earner Stated Income" Loan. This loan was an "Invention" of Lenders at the end of the boon. "Wage-Earner//Stated Income" and the deceitful "Option-Arm" created all the havoc we are witnessing in the market today. The "Landing" would have been softer, if these two had not been around....

Government should not be in the business of bailing businesses out...They should regulate them where they need to...But, what do "Politicians" know about businesses???

[tew]

The rot is everywhere. It's systemic. Massive bubbles like this - built on a decades long secular run and juiced at the end stage by reckless speculation and fraud at every part of the chain - always suck everyone in.

The decline in the dollar represents a "back door" devaluation of all dollar denominated assets, housing included. Yet nominal values are falling anyway. Ultimately places like SF, NYC, and LA will get some cushion from foreign buyers. This trend will end up penetrating into other areas of the country including Miami. It will utlimately support prices, but with the result that less housing stock within U.S. borders will be available for use as shelter by citizens or other full time residents.

[Another]

" Investors believe the government will bail these companies out if they run into trouble: is that true? "

I don't know if its true, but I do know the home purchasers who default on their mortgage(ssss) should be financially ruined. Freddie is only in trouble because of the irresponsibility of the purchasers.

- No pity at all, live in a box.

[Cal]

With Freddie hitting up against various safety and soundness limits and losing money. They only way they can make more money is to sell some of their portfolio into a market that wants nothing to do with mortgages.

But I think it is clear that Fannie/Freddie (both posted losses and hitting against various limitations) will start slowing down their absorption of mortgages and that is just a whole other story. Countrywide was dead back in February it just wasn't smart enough to realize it.

I've said it before, people today don't even realize what a tight money market looks like. The first stages of this credit crunch weren't even getting back to "normal" funding, the guidelines were still very loose. If you want to see a tight money market just wait until a private mortgage insurer blows up (shouldn't be too long now) and Fannie and Freddie slow their purchases.

Be prepared and informed, you will be well rewarded.

[Punktlich]

Compare the British Government bailout of Northern Rock. Governments never let these prodigals die. The shareholders usually lose their investment. But management? NEVER! The head honcho of Northern Rock Adam Applegarth sold his shares at the high, before the crash. All the while, Enron-style, telling the employees what a great investment it was, and importuning them to buy!

Wonder what the inside story of Freddie Mac will turn out to be...

[Brother Joe]

"CEO Compensation" is a major problem!...
Compensation for making "Fraudulent Loans"?
Give me a break!
They screwed the "Real Estate Cycle" up...
And who do they want to hold the bag now?
The Taxpayer....Come on!
They need to return the $$$ from "Stock Options" sales...
Not the "S & L" Debacle again!
I pray not...

[Cal]

"I've been listening to CNBC today and numerous commentators believe the opposite is true: that Freddie's troubles will spur Congress to loosen regulations, perhaps freeing Freddie and Fannie to buy more mortgages, even though their performance at the moment is shaky."

Anyone ever read the story how Chernobyl happened? How safety check after safety check was bypassed because the engineers were trying to accomplish a specific test of the system. And then to everyone surprise the whole thing blew up.

I have no idea why I bring that up here. Guess I'm just babbling.

[anon1137]

Couldn't Angelo refi one of his mansions to get Countrywide some temporary liquidity? If he's worried about his future employment, he could get one of those pay-option ARMs to give himself a little cushion.

[Don]

tew, who are these mythical foreign buyers who will cushion the market in SF/NY/LA? Perhaps they'd buy a 1-2 bedroom pied a terre (most likely in a condo building), but people who can afford expensive foreign real estate are also unlikely to buy into a falling market, I would think.

If there are enough foreign buyers to influence the market, then surely there should be some data on what they're buying.

[toby]

Save your money people. 20% down will get you A LOT of home in about 2 years.

[Another]

Chernobyl was caused by ignorantly ignoring the initial boron control rod reaction affects on the reactor, as well as the arrogance of the Director in charge of the experiment.

This real estate market is caused by greed.

[jdj]

Hey Peter, The Wall St Journal shares your view:
http://online.wsj.com/article/SB119552028786998586.
html?mod=googlenews_wsj