What’s the Hurry?

by Peter G. Miller
August 21st, 2008

For the past few days Fannie Mae and Freddie Mac have been taking a beating on Wall Street. The drop in value since the start of the year has been astonishing for both companies, and it is a matter which should concern anyone who has hopes of financing or refinancing a home.

Fannie Mae and Freddie Mac are the major buyers of local loans. Not once during the past year, if ever, have they stopped buying loans. They are functioning organizations that are central to the U.S. mortgage marketplace.

A few weeks ago there were sudden demands for language within the FHA mortgage reform bill that would allow the government to essentially buy one or both companies. There was a lot of speed to insert such language and very little debate. The necessity for such legislation is entirely unclear. As the Congressional Budget Office reported:

“On July 22, 2008, CBO transmitted an analysis of the Administration’s proposal to provide temporary authority to the Secretary of the Treasury to purchase any obligations and other securities in any amounts issued by the GSEs. CBO estimated that enacting that proposal would increase direct spending by $25 billion over the 2009-2018 period. CBO’s estimate for section 1117 of this legislation is unchanged from its estimate of the administration’s proposal. That estimate reflects a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months, and nearly a 5 percent chance that such assistance would need to cover as-yet unrecognized losses greater than $100 billion.”

No doubt, $25 billion is a lot of money — but Fannie Mae and Freddie Mac are huge, they can readily absorb such losses over a decade. Moreover, there is no assurance that there will be ANY need for government funds — the “estimate reflects a greater than 50 percent chance that the government would provide no financial assistance to the GSEs over the next 17 months.”

On Monday, an article in Barron’s, The Endgame Nears For Fannie and Freddie, said that “an insider in the Bush administration tells Barron’s Fannie and Freddie are being jawboned by the Treasury Department and their new regulator, the Federal Housing Finance Agency (FHFA), to raise more equity. But government officials don’t expect the agencies to succeed. For one thing, only a ‘capital raise’ of $10 billion or more apiece would have any credibility. Yet, what common-stock investors would advance that kind of money to entities that have market capitalizations of $8.5 billion (Fannie) and $4 billion (Freddie), especially as the FHFA will use its new powers to boost dramatically the regulatory capital the GSEs must have in coming years?”

It would be nice to know: Who is this invisible insider? Who says at least $10 billion in new capital apiece is the standard of credibility? Why not $9 billion — or $2 billion?

Again we have a remarkable rush of events, just as we had with the Fannie Mae and Freddie Mac portions of the FHA mortgage reform measure.

Here are two thoughts to consider:

First, appearing on Meet The Press, Treasury Secretary Henry Paulson declared that “we have no plans to insert money” in either institution. Presumably, there is no need for federal money because the two companies can handle their own problems.

Second, take a look at the chart below from Freddie Mac’s second quarter report issued on August 6th. It shows that Freddie Mac is doing far better than the mortgage industry in general.

Freddie Mac Chart

A lot of Fannie Mae and Freddie Mac shareholders have lost much of their investment in the past year. Pensions have been demolished. As Dion and the Belmonts said long ago: I wonder why?

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