Will Fannie and Freddie get bailed out by you and me?

[Robroy]

A couple of very interesting articles on the subject. It seems there is VERY little doubt in some peoples minds.

http://seekingalpha.com/article/84452-a ... -insolvent

http://globaleconomicanalysis.blogspot. ... ation.html
http://seekingalpha.com/article/84429-r ... fannie-mae

http://globaleconomicanalysis.blogspot. ... eddie.html

[TJ_98370]

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Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.

Shares in the two stockholder-owned, government-sponsored companies declined sharply yet again Thursday. Freddie shares dropped 22% to $8 in 4 p.m. composite trading on the New York Stock Exchange. Fannie fell 14% to $13.20. Both stocks are down more than 80% from a year ago and at their lowest closing levels in more than 16 years.

The declines have set off a raging debate on Wall Street over whether the companies, which are crucial to the battered housing market, will need a big cash infusion and possibly government help.

One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear...........

.........The vast majority of mortgages owned or guaranteed by Fannie and Freddie are prime, fixed-rate loans on which borrowers are current. As of April, Fannie said just 1.22% of the single-family loans it owns or guarantees were 90 days or more overdue, and Freddie's equivalent delinquency rate is 0.81%.

Yet the companies have recorded combined losses of $11 billion for the nine months ended March 31. That includes losses realized on the sale of foreclosed homes and provisions for future loan losses, as well as adjusting downward the value of mortgages and related securities. Further heavy losses are likely. Paul Miller, an analyst at Friedman Billings Ramsey & Co., said he doesn't expect the companies to be solidly back in the black until 2011.

One big problem is that the companies never have been required to hold much capital, partly because regulators and Congress used to believe that there wasn't much risk of wide-spread defaults on home mortgages. As of March 31, the companies reported combined capital of $81 billion, only about 1.6% of the mortgages they own or guarantee.

That leaves little cushion for absorbing losses and means they may have to raise large amounts of additional capital. Fannie raised $7.4 billion of capital in April and May through sales of common and preferred shares. Freddie has announced plans to raise $5.5 billion, perhaps in August after second-quarter results are announced.....
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[rose-colored-coolaid]

Gee, it's almost like having the government implicitly back puppet organizations within the financial sector isn't such a brilliant idea.

[TJ_98370]

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Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, said a source familiar with a conversation between Bernanke and Freddie Mac chief Richard Syron.

Bernanke and Syron spoke by telephone Thursday afternoon and in that call the central bank chief said he intended the discount window to be open to the two companies, said a source familiar with the phone conversation.

The Fed declined comment on whether its discount window might be opened to GSEs. Freddie Mac spokesman Douglas Duvall declined to comment when asked about the phone call.
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[rose-colored-coolaid]

Ever see the game Calvinball on Calvin and Hobbes? That's the game where Calvin gets to make up whatever rules he wants as the game proceeds, ensuring that he'll usually win.

For some reason I was just reminded of that game.

[TJ_98370]

Too funny, RCC.