Property Grunt

Sunday, September 07, 2008

Fannie and Freddie sitting in a tree! D-Y-I-N-G!

Unlike the Carpenters, the tune is decidedly more grim.

Obviously we have all heard about the government bail out of Fannie Mae and Freddie Mac. For more more information go to this NYT link..
The New York Times also has a list articles related to the bailout. I highly recommend everyone read it.

Below are some interesting points from the articles.

U.S. Unveils Takeover of Two Mortgage Giants

Mr. Paulson refused to say how much capital the government might eventually have to provide, or what the ultimate cost to taxpayers might be.

He doesn't want to f**king now. If I was Paulson, I would be counting the days until the end of the Bush administration because at that point it will be someone else's problem.

But if you really want to know, the passage below will give you an idea.

The companies are likely to need tens of billions of dollars over the next year, but the cost to taxpayers will largely depend on how fast the housing and mortgage markets recover.


Although this provides little consolation if any at all, it appears that no one is getting out alive

U.S. Rescue Seen at Hand for 2 Mortgage Giants

The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

The bail of Fannie and Freddie has been the talk of the town for quite awhile. But why now?

The declines in the housing and financial markets apparently forced the administration’s hand. With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital, the administration apparently decided it would be better to act now rather than closer to the presidential election in two months.

I completely concur with this perspective. The economy is currently in a s**tastic state and of course we have other international situations to deal with. Fannie Mae and Freddie Mac imploding weeks before the election would have drastic consequences for both candidates and could possible put the whole political process in a state of chaos that would make Florida 2000 look like a bar mitzvah.

Uncertainty plays a key role in elections but too much can really f**k up the program for everyone.

According to this article, this is another part of Paulson's game plan.

U.S. Unveils Takeover of Two Mortgage Giants

The two companies would be allowed to “modestly increase” the size of their existing investment portfolios until the end of 2009, which means they will be allowed to use some of their new taxpayer-supplied capital to buy and hold new mortgages in investment portfolios.

But in a strong indication of Mr. Paulson’s long-term desire to wind down the companies’ portfolios, drastically shrink the role of both Fannie and Freddie and perhaps eliminate their unique status altogether, the plan calls for the companies to start reducing their investment portfolios by 10 percent a year, beginning in 2010.

The investment portfolios now total just over $1.4 trillion, and the plan calls for that to eventually shrink to $250 billion each, or $500 billion total

Is this too little too late?

Of course what is not a big surprise is that these two mortgage behemoths were playing fast and loose with their books.

Mortgage Giant Overstated the Size of Its Capital Base

Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac’s capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the firm’s capital resources and financial stability.

Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.

If they were not cooking the books it appears at least they were doing some sautéing.

This is damn well certain.

As a result of the government’s intervention, the cost of borrowing for Fannie Mae and Freddie Mac should decline, because the government will be standing behind their debts. Equally important, because the government is backing the companies, their buying and selling of loans will continue.

But the plan to bail out the firms will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.