The biggest foreclosure bailout of all ...

A quickie: Calculated Risk highlights St. Louis Fed President William Poole's worries that Fannie Mae and Freddie Mac are headed for trouble.

Poole: "I do not have any information on the GSEs [government-sponsored enterprises] that the market does not also have. Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious problems."

Reality check: Fannie and Freddie reported combined losses of $6 billion in the fourth quarter.

And what happens if Freddie and Fannie get in deep trouble? Poole predicts a bailout: "... unfortunately, the GSEs probably can expect targeted aid. ... the GSEs ... might get assistance directly from Congress ... ."

This is a fair question for presidential candidates: Do you believe there is an implicit government guarantee standing behind Freddie and Fannie? That is, will you support a bailout if they get in trouble?

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo credit: Bloomberg News

Comments

[Kyle]

Recipe for Disaster:

Mix one part lax controls:

Freddie Mae's controls were in such disarray several years ago that they were unable to issue financial statements for a couple of years. This lack of controls led to one of the biggest (under reported) accounting scandals of the decade.

One part corruption:

Freddie and Fannie, enormous quasi-public institutions, are some of the largest political lobbyists/contributors in Washington.

& throw in some hamstringing:

Have Department of Housing and Urban Development push them into making loans for unqualified buyers.

This dish is best served to tax payers in a brown paper bag.

[Cal]

Credit tightening has a lot further to go, Sellers and realtors haven't even come to terms with the credit changes from August/September.

Due to the need for financing buyers have to deal with reality. The sellers and realtors have to deal with a different reality, one that affords them the luxury of denial (at least for awhile). The denial is strong and pervasive and "thinking positive" doesn't help one deal with reality. I believe in looking at the numbers dispassionately and see what they tell you. From their you can choose to be positive or negative but most just choose not to look at the numbers (because they are bad) and choose to simply hope for better times. A true positive thinker would make their times better.

Fannie Mae/Freddie Mac will have to continue to pile on fees and tighten guidelines in the face of severe deterioration across all classes of their massive portfolios. Even with the implied backstop of the government, they are still in the business to make money not lose it. The numbers will drive their actions and the numbers are clear.

[x-man]

I agree with Cal. Now that Wells Fargo requires a 25% down payment for a jumbo, anything from 800-2.5 million is going to have to come down a LOT to move. Most of those houses were bought by people who flipped their way up, and their equity gains are tied up in the downpayment of their current house, which they won't be able to sell. So the market for this range of prices has become: first timers with 300K sitting in the bank. Let me know if you see one.

[CW]

Yes, there's an implicit guarantee. The really bad part about it isn't so much the guarantee itself, but the utter lack of accountability that goes with it. None of these people -- and I do mean none of them -- will pay any price for what they've done. In fact, they will waddle off into the sunset with hundreds of millions of stolen money. That's the outrage here.

[Los in LA]

Yeah, quasi-governmental. As in, when they make money, they are private, when they lose money, they are a government entity.

[Michael Snyder]

I'm sure when George Bush said,"No bailout for speculators." he was referring to John Q Flipper and not his paper-hanging buddies on Wall St. I can read the press release now, "In order to insure the dream of home ownership is preserved for all Americans I've asked Congress to work in a bi-partisan manner to solve this problem. Federal backing is vital to assure confidence in the housing market. Bla bla bla bla bla ad-nauseaum. "
The real speculators in the real estate run up were the Wall St. moguls and Hedge Fund managers who got rich hanging paper. Ambac's rescue is still "in the mail" and MBIA is hanging in by the skin of their teeth. There are billions if not trillions of dollars in investments who's value is directly determined by the health of the entity insuring their stability. Margin call driven claims have left these firms cash poor and put their AAA ratings at risk. This has led to a collapse of the bond auction market and municipalities have suddenly found their debit service costs quadrupling overnight. You can bet they're not happy. While government is pretty thick skinned when it comes to the populace in general, this one cuts deep into its' soft underbelly. You can here the howls echoing through City Hall as major banks no longer "pick up the tab" by acting as a de-facto bidder of last resort.
In an article on Bloomberg.com the expected losses exceed $600 billion of which only $160 billion has been reported so far.
http://www.bloomberg.com/ (Yikes! I can't believe I just said "Only $160 billion." We're in really deep Bandini here.)
In the same posting UBS credit strategist Geraud Charpin wrote in a note to clients. "Leveraged risk positions are a cancer in this market and the sooner it is treated the better.''
Would somebody please give this man Ben Bernanke's phone number? Perhaps they can do lunch. In the meantime the rest of us will be re-allocating our 401(k) plans and joining a credit union.

[CD]

May I please bring your attention to Tanta at Calculatedrisk.com : Muni Bond yields rise sharply.
Please read it and read the comments. There are 93 comments, that's a lot, but it is all there in a big nut shell and it is very scary and forget about RE, something else is about to happen, please read it. CD' from banks in Australia sound good to me at this point. Here we are debating about honor and jingle mail, forget it, it does not matter much anymore....Pension funds will be gone before you know it.

[ShameandScandal]

If by 'implicit guarantee' you mean that the federal government will provide direct $$$ support to the balance sheets of FNM and FRE if/when either/both become insolvent, no, I do not believe that the guarantee exists. Many believe it does.

What I do observe is that the question is becoming more relevant. In the latest earnings/losses announcements and PR spin, the ice is getting treacherously thinner for both FNM and FRE. Now, it looks as if FNM has come up with a program to provide unsecured loans to (qualified) mortgage holders who fall behind on payments, thus protecting FNM from having to buy back those loans, where the loans are contained within FNM securities.

Great for holders of the FNM bonds, maybe not so great for holders of the common shares, who are likely the ones paying for this new insurance policy for bond investors. That could become a very expensive policy in the next few years.

My back-of-the-envelope estimates continue to suggest that, in order to get back to long-term historical multiples of household income, median sales prices in the western U.S. could fall to levels last seen in year 2001. If this nightmare does develop, lots of due-diligent mortgage holders will be under water. Imagine needing (or wanting) to move and not being able to without coming up with a make-whole payment to cover the difference.

Combined with banks' tightening the screws on financings, refinancings, and home equity financings, as well as commercial credit, the solvency question could go center stage as early as 2009, the result of ever-rising delinquencies, foreclosures, and walk-aways.

FNM and FRE can issue debt securities and new common shares, and will. There is no shortage of investment capital in the world. At a price, investors will provide the needed liquidity. Problem wth FNM and FRE is that there is no guarantee that the financial statements come anywhere close to reflecting their actual conditions, which will just further add to the eventual risk premium.

A broader question goes to the range of other 'guarantees' in the government's social contract with citizens and taxpayers, beginning with Social Security and Medicare. If the bailout of FNM and FRE becomes a practical question, the need for 'shared sacrifice' is not too far behind. Then, you can begin to imagine that Medicare becomes a 'take your vitamins' PR campaign. Perfect, we can call it 'universal health care coverage.'

[Dankster]

I expect Freddie and Fannie to get bailed out, if necessary, as well as the big bond insurers. Because of the "systemic risk" the failure of these organizations poses to our entire financial system.

That is, if they're bailable at all. When you start talking about using taxpayer money to keep behemoths like these afloat you're talking about the MOABO. It'll make Iraq look cheap.

But if the entire mortgage finance structure is a systemic risk, bailout or no bailout, it's hard to see how billions or trillions of US wealth won't be lost in the process. From real estate, from GSE market value, from mortgage-backed securities.

After all, if the federal government steps in to make sure that Fannie and Freddie don't default on their mortgage-backed bond obligations, that's pretty much the same as the US taxpayer writing a check to the governments of China, Japan, Russia, etc. that are invested in these bonds, isn't it?

[Jeffrey Sneller]

The lending industry and government are approaching the problem conventionally rather than thinking outside the box. The danger to the world economy is about to reach critical mass, and whether it is John Q. Flipper or homeowners who bought more house then they could afford, the problem requires triage not political speeches or more handouts. When GW suggests that mortage re-negotiation should be between borrower and lender, I don't think he or anyone in his administration has ever attempted to navigate the telephone system of a major bank, let alone negotiate a mortgage modification. There is a solution but it requires a new approach to how mortgage interest is calculated in order to keep payments low. Anyone have any ideas?

[NoWayinLA]

"I expect Freddie and Fannie to get bailed out, if necessary, as well as the big bond insurers. Because of the "systemic risk" the failure of these organizations poses to our entire financial system."

We don't need Freddie and Fannie. Let 'em burn. The government can resurrect the Homeowner's Loan Corporation, and become the provider of home loans based on sound risk assessment, mortgage affordability, and realistic appraisals. And in a rarity of rarities, a government entity would even turn a profit. It did in the Depression. And while the herd of financial institutions receives a much-needed thinning, the machine keeps rolling on.

[Jacob Carroll]

Anyone in need of foreclosure assistance can check out the following links:

stopforeclosurecenter.com
foreclosure-help.biz
foreclosure-solutions.biz
nationalforeclosureblog.blogspot.com
lewisstates.com

Just some pretty good resources I found for anyone in need of assistance.

[TrojanDLA]

The former CEO of FreddieMac was either corrupt or incompetent during the craziest real estate market boom in our lifetime. Worst yet, his multi-million$$$ severance pay when he was terminated was another insult to taxpayers and consumers.

I'm disgusted.