Paulson fails to slow Fannie-Freddie slide

News item from the AP this morning (since updated with an L.A. Times story): "Treasury Secretary Henry Paulson sought for the second straight day to calm investors panicked about the financial state of Fannie Mae and Freddie Mac, saying the agency aims to keep the mortgage finance companies 'in their current form' without a government takeover."

His attempt to calm investors was not particularly successful: At 10:15 L.A. time, Fannie Mae shares were down $4.05, or 31%; Freddie Mac shares were off $2.01, or 25%. Those are the declines this morning. Fannie lost nearly a third of its value today. (Update: At 11:20 a.m., both stocks had recovered some of their losses; Fannie was down 22% for the day and Freddie 9%).

In a note to clients today, Goldman Sachs puts the Fannie-Freddie crisis of confidence in pretty good perspective. The issue, Goldman says, it not how the government figures out a way to keep these two companies alive. The issue is how does the government figure out a way to make them bigger, and in a hurry. That's because, Goldman writes, the U.S. economy desperately needs Fannie and Freddie out there buying mortgages; otherwise, the economy is in even deeper trouble than is now obvious.

From the Goldman note: "The key significance of Fannie Mae and Freddie Mac in the current economic climate is their ability to soften the impact of the credit crunch. Of the almost $25 trillion of lending capacity to the nonfinancial private sector, roughly half -- on-balance-sheet lending by banks and quasi-banks plus private-label securitization -- is either stagnant or shrinking at present. This means that the other half -- of which the $5.3 trillion Fannie/Freddie book of business is the biggest component -- needs to grow rapidly to generate at least some credit growth over time."

More: "In this environment, the federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business. Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support, first with verbal measures -- beyond Treasury Secretary Paulson's brief statement this morning -- and proceeding to outright credit support if needed."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Photo: U.S. Treasury Secretary Henry Paulson, left, looks on as President Bush talks to the media after a meeting with members of his economic team at the Department of Energy in Washington today.
Credit: AFP/Getty Images

Comments

[puckhead]

Goldman nailed it. The govt set the precedent when it arranged the shotgun takeunder of Bear Stearns. Fannie and Freddie Mac have much more ramifications to the economy than Bear Stearns. I said 4 months ago that in some form or another that the govt would have to back stop the mortgage back securities and this is the first step. For all of you that say let Fannie and Freddie fail and dissolve them, when it’s time for you to buy a house or expand your business, who will lend you the money and at what rate? The commercial banks? How much lending will commercial banks be able to do if they can’t sell their mortgages in the secondary market? With limited liquidity at the commercial banks, what rates do you think you’ll be paying? Be careful what you wish for

[Bill]

This is not a recession, it sounds more like a depression. Don't you agree? I mean we are up to our eyebrows in financial turmoil, the price of gas is killing us, and the unavailability of credit to finance the economy is rapidly evaporating. Soon, the U.S. Government will have to file for bankruptcy.

[Mike P.]

Goldman is right, for govt schemes to work (ie rasiing the conforming loan limits), Fannie and Freddie are required to grow and take on more debt, not contract or stop taking on any debt.

The wheels have come off the bus. I think the Fed gave it a pretty good (albeit misguided) try, but the underlying issue was always insolvency, not illiquidity. Trying to pump up a credit bubble by lowering interest rates (the only real tool Bernanke has) was never going to work.

We had several years of incredible inflation (creation of easy credit, leading to higher home prices), now we'll have deflation to correct that bubble.

For you inflationistas out there, there is no wage-price upward spiral going on right now in the US. People are spending less because they have less credit and/or income, and prices on discretionary items are falling as a result. That is deflation. Rising prices in commodities is due to three principle reasons: a weakened dollar, increasing global demand, and money shifting to 'safe' havens looking for higher investment returns.

[TheUrbanHouse]

This is scary... Until this mess gets cleared up, its going to be a long time until the housing market gets back on its feet. This is just yet another one of the hiccups we are seeing as the market continues to progress downward. The junior-jumbos that everyone thought was going to help the middle market in LA, has just been placed on hold until this debacle is straightened out...

[Laker]

Problem is that nobody has the money to buy houses for cash, so most need to borrow.
Real interest rates in current (inflationary) environment need to be at 10-15%. Investors know it, and today refuse to fund mortgages at 6%. The only players that fund these mortgages are Fannie and Freddy. If you take them away you get no 6% mortgages.
Now, there will always be mortgages since there are many dollars in investors pockets. Only thing is again, interest rates will be double digits. This whole problem i believe started when the FED slashed interest rates to 2% and devalued the dollar creating crazy inflation. I think a smarter move was to actually increase the feds rate to 6 or 7%, thereby increase the value of the dollar probably to the range of 1.2-1.4 Euros. While it is true that most ARM holders would have seen their payments explode and therefore many foreclosures. However, mortgage rates in such scenario would be in the 6-7% AND Fannie and Freddy would still be alive and strong.
By the short sighting and only looking for 1 day a head, the fed is on the process of destroying the US economy.
It is crazy to say, but i start to miss Allan Greedspan (Greenspan)...

[Laker]

puckhead wrote: "...With limited liquidity at the commercial banks, what rates do you think you’ll be paying? Be careful what you wish for..."

puckhead,
You are a smart guy. What happens to housing prices when mortgage interest rates go from 6% to 16% fro example???
.....I'm not going to answer this. You know the answer.

[LA Land Fan]

I've just figured it out... Phil Gramm is shockg! You know...everyone here in the comment section is a whiner (nation of whiners), the housing bust is just in our heads (mental recession), it's just the blogs (media) feeding us the doom and gloom, and everything (the US economy) is actually peachy-keen!

[RZ]

I understand that if Freddie Mac and Fannie Mae fail, mortgages will be harder to get. But how will it affect home prices? Do you think they'll drop as a result of the difficulty of getting a mortgage?

[Cal]

Like I said in another post, people are talking in terms of credit crisis not credit bubble and therefore not defining the problem correctly so their solution is flawed.

Goldman is saying, in the face of the largest credit bubble in human history.. we need Fannie/Freddie to extend more credit and grow our way out of the credit bubble... by extending more credit. It simply won't work.

They need to worry about extending credit that makes sense and keeps the institutions solvent.. Not extend credit to keep the bubble going.

It is the same thing that is happening with student loans, that market blew up so the US government is now shouldering the burden. But they fail to realize that the genesis is that too much credit was extended to too many people who will be unable to pay it back.

The solution isn't more credit. You first have to recognize that too much credit was extended and then work to figure out the appropriate level of credit that can be extended then SHRINK (gasp) to that size and try to prevent an overshoot.

I'm with the people who are in the deflation camp, I don't see inflation, I see deflation.

[TheUrbanHouse]

LA Land Fan... You said "the housing bust is just in our heads (mental recession)"

How is this a mental recession when affordability levels are still at all time lows. This is not a mental recession. The runnup took away many years of future profits. There are basic affordability issues going on here. Sure prices may not go down 50% but every year they remain flat, is another +/- 3% down due to inflation. Until incomes rise to match the affordability of what it costs to own a home, the housing market will not be rebalanced. Perhaps there are other issues going on that are "mental" but housing is not one of them.

I'm not a bear about the long term viability of the housing market in LA, but at this point in time, to say what is going on is a mental recession is an absolutely irresponsible statement.

[TakeFive]

Ah, the credit bubble.

They may as well take over Sallie Mae while they've got their checkbook out.

On the flip side, deflation in college tuition would be a good thing for the legions of financial workers that will need retraining.

http://finance.google.com/finance?q=SLM&hl=en

[puckhead]

If rates go double digits, housing and mortgages will be the least of our worries. The economy will contract and I’ll be more worried about my job than buying a new house. Raising rates to that level to battle inflation is like chopping off an arm to cure a broken bone. You don’t fight inflation and decrease the demand for oil by killing the economy. Oil at this point is beyond simple supply and demand. For supply and demand to work there has to be competition and between OPEC, the major oil companies and speculators, there is no competition. If demand goes down then OPEC produces less oil and the oil companies refine less gasoline and the prices stay high. The ECB is foolish in that they think they can fight inflation by raising the rate of the Euro. All that will do is put the screws on more people and put more people out of work. But then, Europe is use to double digit unemployment rates and the welfare state so what do they care.

[Jack]

I love the photo with this story. Paulson is looking at Bush and seems to be realizing, "Gee, this guy really is a clueless dolt, isn't he?" And George W. Doofus looks like he's thinking, "Fannie Mae... she's the ambassador to that funny little country with a name like a vegetable, isn't she?"

[Sam]

Classic picture, if these two don't look like a pair of lost souls. Morons unite

[MyLessThanPrimeBeef]

Paulson will go down in future children's tales as the boy who cried 'It's not a wolf. It's only a sheep' thrice and afterwards nobody listened to him any more.

BTW, Bin Lackey just said that GSE's could call at his discount window, even with used diapers as collateral. Where does the man draw the line? Can congresswomen and congressmen with multiple foreclosed houses stop to say hi at his window?

[Uncle Billy Went to Washington]

MLTPB: Mark my words, Laura Richardson, if not vice-president, will be secretary of the treasury. The discount window will actually be a drive-up window at a Mickey-D's in D.C. and all you'll need to do for your bag of cash is push the button that says: "I will vote Union"

Laura, where are you? What are you doing? See what happens to a country when people aren't honest and don't play fair? Not all bad, though -- you'll get a good workout pushing the towncar up capitol hill after it stops running on fumes.

[Zack]

"Nation of Whiners" did anyone else get an email a few
days ago with Jay Leno's letter to the whining american
public? It is truly sad when politicians have to look to a hack talk show hosts for their talking points. Who knew Jay Leno was such a hypocritical asshole. I always knew he wasn't funny but a closet Republican moron too Wow! His wonderful letter in its entirety:

This is not an indorsement of the president, as much as it is a wake up call for many of us in the USA.

Jay Leno puts it into perspective and makes us think about the pathetic negativity.

Jay Leno wrote this; it's the Jay Leno we don't often see....

"The other day I was reading Newsweek magazine and came across some poll data I found rather hard to believe. It must be true, given the source, right?

The Newsweek poll alleges that 67 percent of Americans are unhappy with the direction the country is headed, and 69 percent of the country is unhappy with the performance of the President. In essence, 2/3's of the citizenry just ain't happy and want a change.

So being the knuckle dragger I am, I started thinking, ''What are we so unhappy about?'' Is it that we have electricity and running water 24 hours a day, 7 days a week?

Is our unhappiness the result of having air conditioning in the summer and heating in the winter?

Could it be that 95.4 percent of these unhappy folks have a job?

Maybe it is the ability to walk into a grocery store at any time, and see more food in moments than Darfur has seen in the last year?

Maybe it is the ability to drive from the Pacific Ocean to the Atlantic Ocean without having to present identification papers as we move through each state?

Or possibly the hundreds of clean and safe motels we would find along the way that can provide temporary shelter?

I guess having thousands of restaurants with varying cuisine from around the world is just not good enough.

Or could it be that when we wreck our car, emergency workers show up and provide services to help all, and even send a helicopter to take you to the hospital.

Perhaps you are one of the 70 percent of Americans who own a home. You may be upset with knowing that in the unfortunate case of a fire, a group of trained firefighters will appear in moments and use top notch equipment to extinguish the flames thus saving you, your family and your belongings.

Or if, while at home watching one of your many flat screen TVs, a burglar or prowler intrudes, an officer equipped with a gun and a bullet-proof vest will come to defend you and your family against attack or loss.

This all in the backdrop of a neighborhood free of bombs or militias raping and pillaging the residents. Neighborhoods where 90 percent of teenagers own cell phones and computers.

How about the complete religious, social and political freedoms we enjoy that are the envy of everyone in the world? Maybe that is what has 67 percent of you folks unhappy.

Fact is we are the largest group of ungrateful, spoiled brats the world has ever seen. No wonder the world loves the U.S. , yet has a great disdain for its citizens. They see us for what we are. The most blessed people in the world who do nothing but complain about what we don't have, and what we hate about the country instead of thanking the good Lord we live here.

I know, I know. What about the President who took us into war and has no plan to get us out? The President who has a measly 31 percent approval rating? Is this the same President who guided the nation in the dark days after 9/11?

The President that cut taxes to bring an economy out of recession? Could this be the same guy who has been called every name in the book for succeeding in keeping all the spoiled ungrateful brats safe from terrorist attacks?

The Commander-In Chief of an all-volunteer army that is out there defending you and me? Did you hear how bad the President is on the news or talk show? Did this news affect you so much, make you so unhappy you couldn't take a look around for yourself and see all the good things and be glad?

Think about it...are you upset at the President because he actually caused you personal pain OR is it because the "Media" told you he was failing to kiss your sorry ungrateful behind every day.

Make no mistake about it. The troops in Iraq and Afghanistan have volunteered to serve, and in many cases may have died for your freedom. There is currently no draft in this country. They didn't have to go.

They are able to refuse to go and end up with either a ''general'' discharge, an ''other than honorable'' discharge or, worst case scenario, a ''dishonorable'' discharge after a few days in the brig.

So why then the flat-out discontentment in the minds of 69 percent of Americans? Say what you want, but I blame it on the media. If it bleeds, it leads; and they specialize in bad news. Everybody will watch a car crash with blood and guts. How many will watch kids selling lemonade at the corner? The media knows this and media outlets are for-profit corporations. They offer what sells, and when criticized, try to defend their actions by "justifying" them in one way or another. Just ask why they tried to allow a murderer like O.J.. Simpson to write a book about "how he didn't kill his wife, but if he did he would have done it this way"...Insane!

Stop buying the negativism you are fed everyday by the media. Shut off the TV, burn Newsweek, and use the New York Times for the bottom of your bird cage. Then start being grateful for all we have as a country. There is exponentially more good than bad.

We are among the most blessed people on Earth, and should thank God several times a day or at least be thankful and appreciative.

"With hurricanes, tornados, fires out of control, mud slides, flooding, severe thunderstorms tearing up the country from one end to another, and with the threat of bird flu and terrorist attacks, "Are we sure this is a good time to take God out of the Pledge of Allegiance?"

Jay Leno


There are so many people that need to read this and grasp the truth of it all.

"When the power of love overcomes the love of power the world will finally know peace". Jimi Hendrix

Jimi just puked in his grave.

[LA Land Fan]

@ TheUrbanHouse...

Sorry if you didn't get it, but I was being facetious. If you are new to this blog, then you don't know our resident troll "Shockg", to whom my comment is aimed at...

[Guy]

I have a genuine question that may reveal my ignorance: Why isn't private mortgage insurance (PMI) adequate to protect mortgage lenders from defaults?

As far as I understood, borrowers had to pay PMI on any mortgage on which they put less than 20% down/equity. Isn't this "insurance" supposed to protect the mortgage lender from the increased risk of lending to borrowers who have very little equity in their houses or are even upside-down? Where is all of the PMI money going? Aren't these "risky" mortgages covered by this insurance policy? Why do mortgage companies need additional bailout?

[anonymous]

Zach,

We are a nation of whiners. We do have a lot ot be grateful for.

But we definately need to correct some serious wrongs, like we are polluting the crap out of the earth, the housing crisis, the high cost of fuel and food, we are at war for the wong reason, or maybe today's news about the senior veteran that was beaten to death for watering flowers in the traffic circle in front of his home (those police were right there, weren't they) There are a LOT of people who are hurting right now.

I say call a spade a spade. Or be honest, at least.

[E]

Oooooooooooooooohhhhhhhhhhhh.

Be Careful What You Wish For!

Got Gold?

[puckhead]

"I have a genuine question that may reveal my ignorance: Why isn't private mortgage insurance (PMI) adequate to protect mortgage lenders from defaults?

As far as I understood, borrowers had to pay PMI on any mortgage on which they put less than 20% down/equity. Isn't this "insurance" supposed to protect the mortgage lender from the increased risk of lending to borrowers who have very little equity in their houses or are even upside-down? Where is all of the PMI money going? Aren't these "risky" mortgages covered by this insurance policy? Why do mortgage companies need additional bailout?"

Because the amount of PMI paid is like a drop of water in an ocean of bad loans. Look at it this way, I'm sure you have auto insurance. If a meteor hits SoCal and your car and 20% of the cars in SoCal are destoyed, I think your auto insurer will have a hard time making good on your auto policy. Buy FEMA will give you some money and send you on your way and all will be good.

[Cal]

Guy,

It is possible that the homes fell more than 20% and then there is the missed interest payments on the capital until you get the capital back.

Many of the riskiest loans didn't have PMI at all, they had a 2nd loan which acted as an equity cushion. Again, all useless once prices get anywhere near the ballpark of a 20% drop.

Then there is the other issue of PMI insolvency. There are some insurers entering "run off" mode and it is questionable whether they will be able to fully pay the claims they are insuring against.

Fannie Mae no longer considers mortgage insurance as a reduction of risk when underwriting loans for all the above reasons.

On smaller balance loans (like the majority of American homes) the total cost of foreclosure is a much higher percentage of the sale price and so you run into these issue much faster. For places like So. Cal. the problem is as acute because Fannie/Freddie weren't a big part of the market because of the conforming limit. I bet Florida, Arizona, and Nevada are bigger issues for Fannie/Freddie as well as economically depressed areas like Ohio and Michigan, though I guess Central California could be hurting them as well.

[MyLessThanPrimeBeef]

Uncle Billy, Laura is a tough gal; she will never cry uncle...not Uncle Billy anway. Maybe Uncle Sam!

[CaptHowdy]

Correct me if I'm wrong - please! - but if the government steps in with a big bailout/cash infusion to keep Fannie-Freddie buying up loans and to keep credit cheap isn't there some sort of negative consequence, namely, further devaluation of the dollar? There's no consequence-free way to keep this juggernaut of cheap and easy lending going, is there?

And if I'm right that this sort of bailout only furthers the dollar's slide, then what are the consequences of THAT? Even higher oil prices? This stuff is all interconnected, right?