Tuesday 26th of November 2024
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all fall down .....

all fall down .....

The word began spreading across Wall Street trading desks on Monday morning: Fannie Mae and Freddie Mac, the giant companies at the heart of the nation’s housing market, might be in trouble. 

The tumult, which continued on Thursday, started with a cautionary analyst’s report, one that might have caused few ripples in normal times. But these are not normal times. Within minutes, the price of the companies’ shares was plunging, sending shock waves through the financial markets, the economy and Washington. 

Fannie Mae and Freddie Mac are so big — they own or guarantee roughly half of the nation’s $12 trillion mortgage market — that the thought that they might falter once seemed unimaginable. But now a trickle of worries about the companies, which has been slowly building for years, has suddenly become a torrent. 

Virtually every home mortgage lender, from giants like Citigroup to the smallest local banks, relies on Fannie Mae and Freddie Mac to grease the wheels of the mortgage market. Virtually every Wall Street bank does business with them. And investors around the world own $5.2 trillion of the debt securities backed by the companies. 

Even as senior Washington officials struggled on Thursday to reassure worried investors and discussed a government intervention that could cost taxpayers billions of dollars, the companies’ stock prices plummeted again in a rush of selling, this time to their lowest level in 17 years. Freddie Mac closed down 22 percent, at $8, and Fannie Mae fell 13.8 percent, to $13.20.  

Loan-Agency Woes Swell From A Trickle To A Torrent

protected rackets?

July 13, 2008
Long Protected by Washington, Fannie and Freddie Ballooned
By JULIE CRESWELL

As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.

Congress established Fannie Mae during the New Deal to make homes more affordable for lower- and middle-income Americans, and Freddie Mac was established later with a similar purpose. Neither provides home loans. Instead, the companies buy mortgages from banks and take on the risks of possible defaults — allowing banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has created chaos for Wall Street and Washington.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street firms, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

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Key US mortgage lender goes bust

IndyMac is the fifth US bank to fail so far this year

One of the largest US mortgage lenders, the California-based IndyMac Bank, has collapsed amid a growing credit crisis.

Federal regulators seized the bank's assets, fearing it might not be able to meet withdrawals by depositors.

It is the second-largest financial institution to fail in US history, regulators say.

The failure came on a day when shares in the two biggest US home loan institutions - Freddie Mac and Fannie Mae - fell at one stage by almost 50%.

IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.

The bank's primary regulator, the Office of Thrift Supervision (OTS), said depositors had withdrawn more than $1.3bn in the past 11 days.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said.

The OTS believed IndyMac was unlikely to meet its depositors' demands and transferred its operations to the Federal Deposit Insurance Corporation, which will seek a buyer.

with what moneys?...

July 14, 2008
Rescue Sought for Fannie and Freddie
By STEPHEN LABATON

WASHINGTON — Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday.

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion.

Today the two companies also hold or guarantee mortgages valued at more than $5 trillion.

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The US government has already put a few hundred billion US dollars to the wind... Are the pundits prepared to waste more? In the long term, the rest of the world is paying for it because the US government is "broke". With plenty of IOUs in the pipeline, the US dollar taking the plunge but the R word is not even mentioned...

Why don't the US have a good old recession, press a few pimples, eliminate the leeches, burn a few economists at the stakes, clean up the place real good, open the windows to fresh air and let Hollywood do the rest. Or is Hollywood too tired and too dusty, and inbred as well?...

President Bush pushed his joke too far... "mission accomplished"?... And suddenly, the US was going to have a revolution on its hands... People discovered that the buck is not god... May be they knew that long ago but let the illusion going by fear of meeting "reality".

The world should be ready for a massive organised shake up... or a massive chaos...

Take your pick.

should have been done long ago...

Fed Sets Rules Meant to Stop Deceptive Lending Practices By STEVEN R. WEISMAN

WASHINGTON — The Federal Reserve adopted sweeping rules on Monday aimed at barring abusive or deceptive mortgage lending practices of the kind that analysts say have led to widespread delinquencies and foreclosures, a collapse of the housing market and an economic downturn.

The rules, which are modifications of draft proposals issued in December, do not take effect until Oct. 1, 2009, in order to give lending institutions time to adjust. The rules will apply only to high-cost loans for people with weak credit.

The Fed chairman, Ben S. Bernanke, said the agency adjusted the original draft in December, making it tougher on lenders in some cases but also incorporating changes that lenders had lobbied for as they warned that too many restrictions would dry up the mortgage market.

The goal, he said, was to end abuses while not aborting a recovery in the housing sector.

“Although the high rate of delinquency has a number of causes,” Mr. Bernanke said, “it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

houses of straw .....

from Crikey ….. 

Australia a vulnerable housing market? You bet your Fannie Mae it is. 

Alan Kohler writes: 

In a rather disturbing way, Fannie Mae and Freddie Mac are not too different from the Australian banks. 

They operate with an implied government guarantee -- not an actual guarantee, of course, but the presumption that they are too big and too important to be allowed to fail. 

They take on liabilities cheaply because of that and then make a very good living lending that money on residential mortgages that are still cheaper than if ordinary borrowers had to go to the wholesale market themselves. Everyone wins. 

Fannie and Freddie are now in trouble because they hold mortgage securities that have to be "marked to market" according to accounting standards, and the market for those things has collapsed. 

All of a sudden their tiny regulatory capital ($US86 billion supporting $US5 trillion of mortgages) is nowhere near enough. 

But imagine what would happen if Australian banks had to value their mortgages at market value. 

There is an Australian secondary market in mortgages and it, too, has collapsed, but thank goodness the banks and their auditors can ignore that and continue to value their residential loan assets at cost. 

And even better for the Australian banks, all of the originators and securitisers that don’t have even the slightest hint of a government guarantee, and have been causing the banks so much competitive grief for the past decade, have fallen away like so much rabble, leaving the banks to get back to making juicy profits on the back of their implied government guarantee, but now with no competition. 

It is truly a beautiful thing for the banks, but no-one in Australia should laugh at the mess that the Americans have gotten into with Fannie and Freddie: there but for the grace of accounting standards go us. 

The only reason the Australian banks didn’t take on a whole lot of securitised assets that would now have to be written down, destroying shareholders’ equity, is that they didn’t have to: their balance sheets are supported by the Australian habit of handing over cheap retail deposits because they’re safe. 

And now that the wholesale markets have dried up, removing an important source of funding for the banks, the government has quietly stepped in via both the Reserve Bank and the Future Fund to make up what the banks aren’t able to get from depositors, as detailed yesterday by Tony Boyd in Business Spectator. 

So when the London School of Economics’ Willem Buiter, writing in the Financial Times, calls the situation with Fannie Mae and Freddie Mac "hypocritical", "deceitful", "dishonest" and "spineless", and says the US government must nationalise them... well, yes, but don’t look too closely at your banks, Willem. 

Fannie Mae was created in 1938 as part of Franklin Delanor Roosevelt’s New Deal and held a monopoly of mortgage securitisation for 30 years, until it was privatised in 1968. Freddie Mac was created in 1970, also as a privately-owned company to provide some competition (although what it actually provided was a cosy duopoly). 

The Commonwealth Bank of Australia was created in 1911 to conduct saving and lending with an explicit government guarantee. Around the time Fannie Mae was created in 1938, its functions were expanded to include central banking and it took over the state savings banks of WA and NSW, but it continued to use the government guarantee to provide housing loans. 

Its privatisation began in 1991 and finished in 1997, but it continued to raise deposits on the same terms and still forms the foundation of the Australian mortgage market -- just as Fannie Mae does still. 

But the Federal National Mortgage Association, as Fannie Mae is really called, is a wholesaler not a retailer, and it holds mortgage securities, not actual loans. 

Those securities have to be valued at market; Commonwealth Bank’s assets do not. Phew. 

Meanwhile, back at panic-stations -- Freddie Mac’s $US3 billion sale of short-term notes went off well last night, but its shares, and those of Fannie Mae, were trashed anyway. They opened higher, but then their inherently unsustainable situation reasserted itself. 

Yesterday Treasury secretary Hank Paulson issued a press release announcing a new three-point plan, presumably hoping the press release would do the trick. 

It had the intended effect of restoring some confidence to begin with, until investors realised that if the US Treasury actually did buy equity in Fannie Mae and Freddie Mac, then those "terms and conditions" would mean current shareholders would be wiped out. 

On a mark-to-market basis, both institutions are probably insolvent and unless there is a rapid recovery in debt values, must be recapitalised. Only the government can do that, so it will probably have to. 

Australians are more indebted than Americans and Australian houses are higher priced and less affordable than those in the US. If anything, the Australian economy is more vulnerable to a housing/mortgage market crisis than the US. 

So with the Pope in town, let’s all thank God for accounting standards.