by Deb Cupples | Fannie Mae and Freddie Mac help keep mortgages available to ordinary Americans by buying mortgages from private lenders. Fannie and Freddie are private companies (owned by shareholders), yet they have a public mission (enabling Americans to get mortgages). They are somewhat backed by the federal government.
Together, Fannie and Freddie own about half of the mortgages in America. Though no nobody in the media seems to understand the specifics, Fannie and Freedie seem to be in big trouble. Today's New York Times reports:
"Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
"The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.
"Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers." (NY Times)
I spoke with a well seasoned financial adviser today, who usually answers every finance-related question I pose. About Fannie and Freddie, he flatly said that he doesn't understand exactly what's going on.
Particularly puzzling to him is that Fannie's and Freddie's stock prices dropped 30% and 45% respectively. That's partially because most people don't know what is on Fannie's and Freddie's books.
My adviser pointed me to a statement by James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO) -- which oversees Fannie and Freddie -- who said the following:
"As I have said before, they [Fannie and Freddie] are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets."
This statement has caused many onlookers to wonder why (if Fannie and Freddie are "adequately capitalized") the federal government is considering taking over or bailing out Fannie and Freddie.
I have no expertise in finance. However, if Fannie and Freddie were buying up mortgages, it seems only natural that they would have been caught in the same trap as many other institutions (i.e., paying inflated prices for mortgages, many of which were destined for default).
I asked my adviser about this, and he said that not all of Fannie's and Freddie's mortgages were bad (i.e., destined for default). Without knowing what's on the Enterprises' books, he can't figure out precisely what happened.
At a House committee hearing yesterday, our nation's Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke skirted questions from our congressmen. (NY Times)
I can't help wondering whether Fannie and Freddie's apparent problems stem more from incompetence or corruption. If Bush Administration officials choose to be open and honest with us taxpayers, we may come to know, in time, what really happened.
Presumptive Republican presidential nominee John McCain commented:
"Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail.” (NYT)
Presumptive Democratic nominee Barack Obama's economic adviser Jason Furman said that Sen. Obama --
"believes the Bush administration’s willful neglect of warning signs in housing, in financial markets and in the job market, have compromised the nation’s housing finance system. The challenges facing Fannie and Freddie are part of the broader weakness in our economy.” (NYT)
Of course, we already know -- through seven years of watching the crumbling -- that the Bush Administration's policies haven't been good for our economy.
It would have been more interesting if Sen. Obama's spokesperson had actually told us where Sen. Obama stands on Fannie and Freddie: do we let them go down (which many Republicans and big lending institutions have wanted for years) or do we save them?
Memeorandum has commentary.
Other BN-Politics Posts:
* FISA: How they Voted and What it Means
* Surely You Jest: 300 Economists Support McCain's Plan?
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