Treasury Is Close to Finalizing Plan to Backstop Fannie, Fre

[LUC]

WASHINGTON -- The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter.


The plan includes changes to senior management at both companies, according to a person familiar with the plans.

An announcement could come as early as this weekend.

On Friday, a series of high-level meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies' new regulator, the Federal Housing Finance Agency.

Treasury has been working with bankers at Morgan Stanley to use its newfound authority, granted by Congress in July, to devise a way to prop up the mortgage giants, which have been pummeled by investors in recent weeks.

The two giants are vital cogs in the U.S. housing market and their financial woes have threatened to worsen the bursting of the housing bubble.

"We are making progress on our work," said Treasury spokeswoman Jennifer Zuccarelli. She declined to comment further on Treasury's plans.

[Matthew]

Wow... Wow... Looks like E's 20 cents on the dollar call isn't looking so wingnut afterall!

All that's going to be left is FHA. 20% down and 30yr fixed here we come!

[rose-colored-coolaid]

[Matthew]

RCC,

I can very easily envision a 80% decline scenario. Picture this:

1. Nearly all buyers without 20 percent down and nearly perfect credit are off the grid.

2. Unemployment increasing rapidly (up to 6.1% nationally)

3. Foreclosures increasing rapidly (Seattle just now going underwater, foreclosures will be increasing by the day)

4. ARMS (particularly option ARMs) still resetting

5. Nearly all exotic loans and many typical ARMs will be nonexistant

6. Yields skyrocket upward, increasing mortgage rates to double digits.


Doesn't seem too unlikely considering what is unfolding. I'd say more likely than not at this point.

[Lake Hills Renter]

[sniglet]

[jillayne]

"The bigger problems will be the fall-out that occurs when many financial institutions that own GSE stock have to take an even bigger bath than they already have"

We don't know the full damage/fallout from this yet.

We're in unchartered territory now. I'm not sure what the government is going to do with F&F.

What I'd like to do is get the conversation going NOW about the FHA mortgage insurance program.

(FHA doesn't buy loans, they insure mortgage loans made by lenders.)

If FHA is STILL doing 3.5% loans in a declining market, then we can look forward to hundreds of thousands of FHA loans that are being originated now....in 2008....to be underwater in the next 12-18 months.

When F&F started buying jumbos, many said F&F would have to be bailed out. I thought, maybe 2011, 2012. Never did I imagine it would happen so soon.

Without FHA, all bets are off in terms of how bad this entire mess can get.

[EconE]

Jillayne...

I can understand where you might have thought that it wouldn't happen so fast as Seattle is your major point of reference. If you look down in Los Angeles at areas such as East LA, Compton, Watts, Highland Park etc. (using Redfin of course), it is an absolute bloodbath. I've seen houses that are 50-75% off their original selling price of 500K+. Not to mention many many other areas down there. When the option-ARM's hit down there it will probably be even worse as the houses will be the 1-1.5 million$ homes and will ultimately incur higher $ losses for the banks. I've even seen $2 Million dollar (2005 sale) homes that have been listed for over a year and have the prices chopped to $1.2MM and they aren't selling.

The worst thing is...the next wave is just starting

[Matthew]

Sniglet,

We'll have to wait for more details to come out on this, but the proposals that i have seen place the GSE's under FHA control. I'm assuming that FHA management is going to be doing some substantial tightening of standards, but who knows.

Whatever the ultimate outcome, I still see mortgage rates going up substantially on this news. I also think we are about a half step away from the bond market collapsing.

[sniglet]

[Matthew]

To clarify another point, the GSE's don't make loans, they buy them and guarantee them. We'll see if it's biz as usual with them or if this somehow alters the way they do biz. My guess is that under FHA management we are going to see some SERIOUS tightening.

[rose-colored-coolaid]

[cheapseats]

CNN just ran a piece that the Fed will be taking over F&F?

[TJ_98370]

.

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Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control,......
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[Matthew]

RCC,

Do I have proof?? Absolutely not. I don't think anyone can "prove" exactly what the decline will be, we can only make educated guesses. My guess is based on what will happen if the median house prices falls back in line with 2.5-3 times median income with a possible over correction (ala Japan). That would put us in the 80 percent correction range.

I'm all ears if someone has an educated guess that makes more sense than this.