Fannie, Freddie Race Banks To Bottom
By Scott Reeves Jul 23, 2008 1:45 pm
Bailout could cost taxpayers $25 billion.
Fannie Mae (FNM) and Freddie Mac (FRE) may be unintentionally driving down prices in already depressed markets to the detriment of commercial lenders such as Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Wachovia (WB).
In Michigan, Fannie Mae couldn’t unload a three-bedroom house for $6,900 at a foreclosure sale, forcing a price cut to $5,000. The house sold for $110,000 three years ago.
Such sales add to the downward pressure on surrounding properties' prices in what may already be a depressed area - and it comes from a federal agency that’s intended to backstop the housing industry in tough times. In extreme cases, this could lead to blight and a continued downward spiral in prices.
Fannie Mae and Freddie Mac, the two largest U.S. mortgage financing institutions, held foreclosed houses valued at a total of $6.9 billion on March 31. Foreclosed properties held by the nation’s commercial banks and savings and loans totaled $8.6 billion.
Like the house in Michigan, foreclosed properties typically sell at a steep discount. This suggests the need to sell quickly before prices go any lower. Either way, foreclosure sales are bad news for the nation’s taxpayers and commercial banks.
The irony: Fannie and Freddie may be racing commercial institutions to the bottom -- or something close to it -- and the two government-sponsored entities may be fueling the commercial lenders' freefall.
Congress created Fannie Mae in 1938 as part of President Roosevelt’s plan to revive the economy during the Depression; Freddie Mac was launched in 1970. The agencies are now the chief providers of mortgage financing; they own or guarantee about 80% of the mortgages originated this year.
The downbeat housing market has touched off fears about their solvency and their stock price has been getting pounded. Fannie Mae recently traded at $15.84 a share, with a 52-week range of $6.68 to $70.57. Freddie Mac recently fetched $10.94 a share; the 52-week range is $3.89 to $67.20.
Treasury and Federal Reserve officials have announced plans to back the companies. Speaking Tuesday in New York, Treasury Secretary Henry Paulson said the stability of Fannie and Freddie are the key to easing uncertainty about U.S. financial markets.
Members of Congress are currently working out a deal that would allow Uncle Sam to help Fannie Mae and Freddie Mac in an emergency. The deal would revise supervision of the agencies and allow the government to insure up to $300 billion in refinanced mortgages.
Congress plans to include $4 billion in the bill to help local governments buy and rehabilitate foreclosed houses. President Bush opposes this provision but backs other sections of the bill; it’s not clear whether he’ll sign it into law or veto it as threatened.
The Congressional Budget Office, a nonpartisan agency, says a temporary measure to back Fannie and Freddie could cost taxpayers as much as $25 billion.
Fannie and Freddie aren’t yet selling apples to each other, but the trend is clear: Taxpayers of America, open your wallets.
No position in stocks mentioned.
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Reply
2008-07-23 23:26:05
Missing in Action
Any analysis of GSEs failing to mention the mountain of Wall Street created securities leveraging real estate related revenue streams -- securities whose very existence would be improbable were it not for offshore financial institutions sanctioned by the BoE, where hundreds of trillions of OTC derivatives originate -- is faulty at best. THIS is what's behind financial institution troubles. THIS is what's at stake.
Citing fire sale foreclosures as being behind the woes of GSEs and commercial and regional banks holding this junk really is disingenuous. The problem is waaaay too much leverage and ZERO CONFIDENCE. This has been the case for over a year now.
Surely, Paulson knows the present arrangement can't be bailed out. Taxpayer revenues in this grotesquely debt-riddled nation simply cannot possibly fill the hole.
All that can be done is attempt to contain the bloodshed from the coming shark feeding fest. And on this count Chairman Cox is on board.
FNM and FRE equity? It's probably going to zero. The former BSC is pointing the way of things likely to come. Yes, indeed, the trend may be your friend, but with friends like these who make Jaws look like a goldfish, who needs enemies?
Citing fire sale foreclosures as being behind the woes of GSEs and commercial and regional banks holding this junk really is disingenuous. The problem is waaaay too much leverage and ZERO CONFIDENCE. This has been the case for over a year now.
Surely, Paulson knows the present arrangement can't be bailed out. Taxpayer revenues in this grotesquely debt-riddled nation simply cannot possibly fill the hole.
All that can be done is attempt to contain the bloodshed from the coming shark feeding fest. And on this count Chairman Cox is on board.
FNM and FRE equity? It's probably going to zero. The former BSC is pointing the way of things likely to come. Yes, indeed, the trend may be your friend, but with friends like these who make Jaws look like a goldfish, who needs enemies?
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