It has been interesting the past 2 days, reading what is going on with the drop in stock prices of both Fannie Mae & Freddie Mac. I've had the luxury of a little time today to read several different articles about the whole shebang.
The most interesting thing is the disparity between the headlines and the quotes from analysts & investors within the same article! While a banners consistently scream of impending doom, the body of the articles consistently quote financial industry insiders who say the same thing: "Don't panic, cooler heads will prevail," and talk about the fact that "these companies are too important to the overall U.S. economy to be allowed to fail."
The point I'm trying to make is that disaster sells soap, and the media counts on the general public reading only the headlines, not the story underneath. We have to educate our clients, colleagues and anyone we can that there is more than panic underneath the clouds. It may be raining, but the sky is not going to fall.
There are some difficulties, and interest rates may well go up, but to buy into the doom of the headlines without knowing the story underneath will only make people miss the opportunity that is right in front of them. Isn't it smarter to buy an umbrella today, when they are plentiful and affordable than wonder why you can't get one later?
Kent Simpson
Specializing in Buyer & Seller Representation in the Tucson, Arizona real estate market.
All original material written by Kent Simpson unless attributed to source.©2011, 2010, 2009,2008,2007
"Never forget - Real Estate Is About People"
Heard much the same today on the radio. These institutions are too important to be allowed to fail. Thanks for writing. Veronica
Great article I did hear alot of fuzz today
The problem is both Fannie and Freddie are insolvent many times over anyway you run the math no matter how many times they like to claim they are adaquatly capitalized. The question is how will they failed. Will the government try and backstop the $5 trillion in outstanding mortgages they insure? Will the government nationalize them, but not backstop the debt? That's the real question and each scenario runs some real risks. Choosing the wrong one (and I'm not sure if there is a right one) could cause a substantial flight out of long treasuries which we saw the beginnings of today. It's gonna be interesting.
OFHEO put out a notice yesterday reassuring their subscribers that the GSEs are alive and well, and are still well capitalized. Just the doom & gloom seekers burning up the wires.
I APPRECIATE THE BLOG- IT IS INTERESTING, INFORMATIVE AND CORRECT.
KEEP ON BLOGGING- HAVE A GREAT DAY.
BILL
Karen, and you believe them? The GSE's are levered 100X on their capital base. That means 1% defaults across their portfolio wipe them out. In reality the defaults on their portfolio are already higher than that. The regulators are covering ass on this one...
Thanks for being the 1st & 2nd to respond, Veronica & ERA!
Karen, thanks for adding the info about OFHEO.
Matt - one thing to keep in mind is that this is not just an issue that will be dealt with on the financial side, it is also a political issue. The question is not whether it makes financial sense, but does anyone have the political will to let either or both of these entities go belly up?
Bill - thanks for the kind words.
Matt - Do I believe them? I believe the GSEs have met the requirements set for them. I didn't hear much balking earlier this year when OFHEO and Congress declared the GSEs to be in good shape, having met the correctional measures imposed on them after all their accounting snafus. But I also believe the "capitalization bar" has been lowered so many times, it no longer does much in the way of protection.
The "funny number" in the newest estimate is the $25 billion dollar price tag ... the amount the politicians say it would take to bail out the two. With trillions of dollars in mortgages... a certain percentage being alt-a and sub-prime, all I can say is I don't know the answer to that math question. It will be interesting to see how the market reacts to the upcoming "rescue" bill. So much of the market valuation is based on public belief in any given company. The media ping pong on this one seems to be one part financial and two parts political. I like the "cool heads" approach for that very reason. Panic devalues institutions- and we sure are seeing that a bit lately.
Karen, Chuck - thanks for adding to the discussion! I'm sure we will see lots of scenarios bandied about in the next 6 months or so.
I don't think there are many options on this one. If Fannie or Freddie go away, what happens to the housing market? Does that imply that lenders will have to service all of their own debt because there is no conduit to package and sell these loans? Will that limit our lenders in terms of how much they have to lend? And if so, what will this do to rates? If I were the lender, I would drastically increase my lending standards especially regarding how much reserves we would require. This might also create a wide range of interest rates being offered by the lenders. Based on just these few possibilities, I don't think the federal government would ever allow these institutions to fail.
Best Regards,
Patrick
Patrick - thanks for stopping by. I think you and I are on the same page here.