Why the troubles at Fannie and Freddie are yours

The big mortgage news locally yesterday was IndyMac's dramatic exit from the mortgage business, at a cost of 3,800 jobs. But investors knew IndyMac was toast, and something like this was coming -- that's why IndyMac has been a penny stock lately.

The bigger news -- at least financially -- was the sharp sell-off in shares of Fannie Mae and Freddie Mac, which is Wall Street's way of saying the following: the housing and mortgage markets are deteriorating, and Fannie and Freddie are going to need to raise money to survive. If you don't believe Wall Street's analysis, take it from the Fed chairman this morning: "The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning," Ben Bernanke said in a speech in Virginia.

The New York Times on the Fannie/Freddie selloff: "Fannie Mae and Freddie Mac are the largest U.S. buyers of home mortgages, and traditionally the government’s backstop for the housing economy. But with the plunge Monday, each of these 'government-sponsored enterprises' has now lost more than 60 percent of its market value this year. The declines, along with a falling stock market and growing unease about the possibility of more losses at big banks, reflect a growing consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared."

More: " 'If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,' said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company."

It's received wisdom at this point that Washington will find a way to bail out Fannie and Freddie if they run into deep trouble. With your money, of course. It's a question I'd like to see put to Obama and McCain, just to understand their thinking on the issue -- would they support such a bailout?

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News

Comments

[William E. Jones]

Does this mean that today Chuck Schumer is going to write a letter to the Feds expressing concern about the safety of Freddie and Fannie? How 'bout the MD-80 that Barack Obama flies on? Is Chuck going to write a letter about the MD-80, so no one will want to fly on one?

[Peter T]

I hope congress doesn't bail out anybody connected to Fannie and Freddie: Let the shareholders lose everyting, let the old MBS find their market value, and give FUTURE MBS an explicit federal guarantee, for paying some insurance fee to the Treasury.

[Gina]

This news only underscores the woeful incompetence of the Bush Administration. There were warning signs for years that the mortgage system was heading into the shoals, and Bush et. al. ignored them and did nothing. He needed the false prosperity caused by the housing bubble to prop up his sagging economy that was hemorrhaging because of the Iraq debacle. Once again, George W. Bush failed to do his job, and once again George Bush is squarely to blame for this mess, more so than anyone else in Washington. Notwithstanding the Bush policy of "the buck never stops here," reality trumps fiction.

[Laker]

Peter, of course both McCain and Obama will support bailout for Fannie and Freddie.
The problem is that these entities got in trouble because they bought bad loans and financed borrowers with 0 down.
Government should not be in a business of giving sub prime loans. That is the job of private banks. They can take the risk and charge higher interest rates. Government should only be giving loans that are backed by 20% cash down or more and FICO above 700!
People with less than 20% down or FICO lower than 650 should not be buying houses, they should rent, save for down payment and repair their credit.

[Lynnette]

Is it "received" wisdom or is it "perceived"?

[Theron]

Do we know how much of F&F's troubles are related to the loosening of their standards that has been done after the meltdown? In other words do they need a bailout because they were 'bailed in' on purpose?

[JPG]

Meanwhile, bailout Ben is coming to the rescue of sub-prime borrowers:

http://tinyurl.com/6yo8n4

What a novel concept that lenders will actually have to verify income and assure that a borrower can repay the loan AND pay for taxes and insurance (which to anyone with half a brain seems like it would be in the lender's self interest especially now that there's no one to pass the debt along to as a repackaged security - right? Please tell me investors aren't still buying securitized mortgages). But of course the article says the lenders think these rules are "too tough and could crimp customers' choices." Who are these idiots and how are they still running companies?

Unfortunately the article doesn't attribute that sentiment to a person or group so there's no chance for blogo-humiliation.

[CD]

Well here we are Peter, it took about one year for the truth to come out , no more cheerleading now.....The great silence.....The money is gone. Lets line up Bush, Paulson, Cheney, Mr Orange and Perry and have a panel discussion....America, you have been raped by your Daddies !!!!!! Attila the Hun could not have done better.

[sheila]

we are already bailing them out.

bernanke's loan programs (including financing the bear stearns salvation), plummeting equity, fiscal crises at the state and local levels, reduced government services, huge unemployment, wage stagnation, increased cost (and decreased availability) of borrowing for normal things, devaluation of the dollar, stock market instability/drops, reduced savings rates, increased bankruptcies/ foreclosures, increased rents, decreased consumer confidence/ purchasing power, high inflation, etc.

so many people are now living on the knife's edge with skyrocketing fuel, healthcare and higher education costs, and inevitable tax increases to pay for insane (but highly profitable) wars and deficit spending, it is only a matter of time until the next wave of (completely blameless) people start tumbling over.

this would just formalize the bailout that is already occurring. i'm not saying formalizing it's good or bad, just that the effects of the mortgage meltdown will continue to be socialized while the hedge funders and mortgage bankers keep their ill-gotten gains, pay 15% capital gains taxes (the former, at least), and orchestrate the next bubble.

the rich and powerful are always completely insulated from their rapacious behavior and the middle and lower classes always eat it. as mel brooks famously said "it's good to be the king!"

[Nelcisco]

URGENT: Mortgage consultant looking for work, possible career change, hard working and honest.

Damn, if I hear more news like this (Fannie/ Freddie, IndyMac) I'll go broke.

[tew]

Everyone needs to be very vocal: If there is a bailout of Freddie and/or Fannie it should require a) cancellation of common shares (shares go to zero), b) negotiated reductions in principle for other members of the capital structure, and c) that the government be made whole in some manner in the future (the bailout would be structured as a loan).

[problemwithcaring]

What did Cal say about the increase in the conforming loan limit 6 months ago? Oh yeah, that right...

While I dont think this will have a big impact in California, due to the tighter underwriting standards that the GSEs employ, there is a big unintended consequence on the housing market... that the GSE capital will be soaked up by California (and other parts of the country) Jumbos leaving a lot less for everyone else.. rates will go up as a result and the stress on the GSEs will increase.

Posted by: Cal | January 24, 2008 at 04:07 PM

[problemwithcaring]

What did Cal say about the increase in the conforming loan limit 6 months ago? Oh yeah, that right...

While I dont think this will have a big impact in California, due to the tighter underwriting standards that the GSEs employ, there is a big unintended consequence on the housing market... that the GSE capital will be soaked up by California (and other parts of the country) Jumbos leaving a lot less for everyone else.. rates will go up as a result and the stress on the GSEs will increase.

Posted by: Cal | January 24, 2008 at 04:07 PM

[Cal]

problemwithcaring: Now you have to go and quote me when I'm wrong otherwise I'll start getting full of myself. ;-)

If the pressure continues to be concentrated on the GSEs I think they will have to tighten underwriting again. I still hear about them granting a lot of documentation waivers and it appears the loan officers are using that as a backdoor stated income to get people approved. Documentation needs to be increased not reduced if the GSEs are going to try and maintain this level of underwriting criteria.

If one GSE, by way of tighter lending standards, let the other "grow into the downturn" (a la Countrywide) we could have a situation where we have one remaining stable GSE to take advantage of the market while the other that tried to stand in front of the train picks up the pieces.

The time to reduced the severity and depth of this downturn isn't now, it is a few years from now. Today aggressive loan programs are just throwing good money after bad. But if you did the same loan programs when prices were aligned with income you could reduce the overshoot in prices to the downside.

[TrojanDLA]

Gina, it wouldn't have mattered who was president, Bush, Clinton, Obama - during times of great prosperity, the administration in office will ride the wave and take full credit for all the revenue the bubble produced.

Do you think Clinton/Gore cared that the tech bubble was going to crash when things were flying high in 1999? Even Greenspan commented that the stock markets were behaving in irrationally in 1999, but because of all the paper wealth being produced, NOBODY wanted to rock that boat.

Presidents, past, present and future, do not like to change the status quo unless there is a crisis already in play - "don't fix it if it ain't broke" mentality is a very safe way to run the country. Hasn't our government (and all other governments) always had a history of the "wait and see" approach? The circumstances surrounding this credit/bubble crisis has little to do with the actual leadership and more to do with our system of government. Congress/President will not respond until something bad actually happens, because in all practicality, they have no time to address "speculative" risks when real problems need to be solved.