Friday, September 5, 2008

FEDERAL GOVERNMENT SEIZES CONTROL OF GIANT MORTGAGE LOSERS FANNIE MAE & FREDDIE MAC

From WaPo:

Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company's common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.

Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies' losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

From NYTimes:

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

From WSJ:

An announcement could come as early as this weekend. Some details are still being worked out, which means terms of the arrangement could change.

Any move by Treasury would represent perhaps the most significant intervention by the government in the financial industry since the housing bust touched off turmoil in the credit markets a little more than a year ago. From the $168 billion economic-stimulus package in February through the bailout of investment bank Bear Stearns Cos., the Bush administration and the Federal Reserve have taken an increasingly aggressive stance in responding to what has become one of the worst financial crises in decades.

Fannie and Freddie are vital cogs in the U.S. housing market. Their troubles have threatened to worsen the bursting of the housing bubble, which has led to a surge in foreclosures. (See related article.) A Treasury intervention could help Main Street borrowers by keeping interest rates on mortgages lower than they would be in the event of continued instability.

The Treasury's emergency powers to backstop Fannie and Freddie, which it won as the result of legislation passed by Congress in July, last until the end of 2009. A decision about their future role could be handed off to the next administration and the next Congress.

Note: the stories will continue to be updated at their originial sites throughout the weekend.

11 comments:

Plapdip's Blog said...

From the WaPo article - Mudd and Syron were accompanied by lawyers because they're afraid of being prosecuted for the PONZI SCHEME and FRAUDULENT LENDING PRACTICES they've been helping to perpetuate on the American public.

"Executives of the two companies were told to show up without being told of an agenda. Daniel H. Mudd, chief executive of Fannie Mae, was accompanied by lawyers from Sullivan and Cromwell, the company's outside counsel. He arrived at 3 p.m. for a two-hour meeting. Richard F. Syron, chief executive of Freddie Mac, began his meeting at about 5 p.m., accompanied by several members of the Freddie Mac board and lawyers from the firm Covington and Burling."

george h said...

I'm seeing this on Saturday PM: the NYTimes article about how much Freddie lied about its capitalization.

It's going to get much worse as details come out.

Anonymous said...

is now a good time to buy a house?

Jim Duncan said...

Anonymous - if you're buying for the right reasons, now could absolutely be a great time to buy a house.

Some of the right reasons -

1 - you're pre-qualified
2 - in a relatively stable job (relatively as everything is relative nowadays)
3 - you plan to stay for at least 3-5 years.
4 - You're willing and able to educate yourself about the market

brooklyn bob said...

From the story George H mentions, lying about capitalization:

"Finally, regulators are concerned that the companies may have mischaracterized their financial health by relaxing their accounting policies on losses.... For years, both companies have effectively recognized losses whenever payments on a loan are 90 days past due. But, in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of loans have not been marked down in value."

Not recognizing a loan as a loss until it is TWO YEARS LATE?

Talk about creative.

Anonymous is being snarky; Jim is being kind. But Jim may be right. Any property on the market right now HAS to sell. The mortgage system may continue smoothly now that it is federally controlled...but the economy will continue tanking for a while.

Solution: Lowball Offer.

Real C'ville - The Bubble Blog said...

The NYTimes article mentioned above is here:

http://tinyurl.com/5kzuz3


Jim has a good point in #4. A buyer needs to know what s/he is getting into with a purchase. And somehow try to ascertain what a "good" price for a house would be right now, so that they don't get into a negative equity situation.

With F & F under fed control, mortgages may come down. Still, as minds greater than ours are pointing out, the economy will remain troubled for months to come.

And there's also the problem of inventory to work through--lots of inventory.

Anonymous said...

(different anonymous than above)

can one find/negotiate a deal in this market? of course, just like one could find/negotiate a deal in any other market in the past. But the only ones who I hear saying it's a good time to buy are those who have a commission at stake (or the organizations who are supported by those that depend on the commissions).

Is it a good time to catch a falling knife? It's not like the stock market, where it's nearly impossible to judge the bottom of the market. But the experts ARE saying that the housing market will get worse before it gets better and look for 2010 (if that) for recovery. Personally, I don't want to put 5, 10, 20% of my money (downpayment) into a home that I KNOW a year or two later will be worth less than when I bought it.

Right now, the consumer (as a collective) is acting more rational than all these real estate "agents" want them to.
When will an RE agent EVER say, "no, now is not a good time to buy". Surely there have been and will be markets in which that would be the prudent and proper position to take. But don't hold your breath.

Anonymous said...

anonymous #3 here

i'm guessing that the same properties that are available now, about 2,600 in Charlottesville Albemarle, will for the most part be available after the Election, even after the new year.

you have to be in love with a property to buy right now, no matter what the price point is.

real estate agents can't be "honest" the same way most retail or wholesalers can't. we just expect them to because there's a whole industry built up around the concept of HOME. (it's not "house" sales, as the bubble blog has pointed out, it's HOME sales). when someone is selling you something that's suppposed to be near and dear to your heart we somehow expect more honesty.

but it's really just a large object (a large OVERVALUED object. and to sell something for that much $, there's not a lot of "truth."

(wish i knew how to bold on blogger, but i don't)

Montpellier said...

I respect Jim, so I have to respectfully disagree, or rather, add emphasis to Brooklyn Bob, now is an OK time for a serious low-ball offer.

Prices around here have not reverted to the mean yet, no matter what the MSM says about the "national housing market". Prices in California and Florida, where the foreclosure crisis is much futher along the process, have reverted to the mean, and that gives a sense in the national media stories that we're reaching 'a bottom' - please remember, a landing on the stairs is 'a' bottom - but not 'the' bottom.

Prices here have a ways to go - we're not even back to nominal 2004 prices, and you have to remember the peak was in '06 around here (unlike the 'national' peak in Oct. '05). If you are really looking long-term, and I'd suggest that is at least ten-years-plus out, you will be OK recouping your 'investment'.

However, from the perspective of a purely financial deal or transaction, unless you lowball significantly (and the seller is capable of accepting your lowball) and get back to at least '03 pricing, you'll be leaving money on the table.

The Fannie Mae and Freddie Mac collapse means there's even less mortgage money out there chasing properties - that it's been privatized means that 'investors' have signaled, through the markets, that loaning money at these inflated house prices is a loser deal. Listen to the market.

Of course, the first rule of thumb in making any 'deal' is that you must be prepared to walk away. If you have an "emotional investment" in a house - particularly one you just found - you'll be weakening your own hand with the seller. Jim knows this, and while I don't have time to provide the link to his blog post, he wrote as much when describing the difference between a home and other 'fungible goods' like other commodities. Please see the comments from "interview with a buyer" where the buyer mentions getting a late counter offer from a seller who had initially turned down his lowball offer.

Do not mistake: the government will not be giving away free money here - they will have their hands full just keeping things moving at the current, highly contracted, state. This bailout does not mean that getting a loan will get easier, and there's a good likelihood that credit standards will get even tighter, even if rates drop. That means fewer buyers chasing more properties. That means prices are coming down.

The Prime ARM resets are getting ready to really hit now; next Spring's market will be full capitulation, if not sooner.

Montpellier said...

Oh my, I should proof-read:

in re: FNM/FRE, "privatized" should be "nationalized". To explain my comment - neither of these institutions can raise capital to keep operating - private investors will not put their own money into these deals, because they believe the housing/mortgage market is a sure money-loser.

Real C'ville - The Bubble Blog said...

Sage words, as usual, from Montpellier.

He points out that the "peak of the bubble" in C'ville Albemarle was in 2006 instead of Oct. 2005, nationally.

In some neighborhoods, however, the momentum of the "peak"--highest dollar askings--continued far into 2006 and onward into 2007--we're thinking of Belmont and Fifeville, of course, which to this day still have ridiculous Asking prices from sellers/investors who really don't "get it."

Fan & Fred *had* to be nationalized: not only were they lying about capital (especially Fred) investors wanted 2+% *more* than the yield on Treasuries for Mortgage-backed securities, because these are so risky. This is impossible to sustain.

Additionally, though the Giant Mortgage Losers have been nationalized, the rolling Alt-A and Prime foreclosures are going to continue.

The FDIC had to issue a warning (see CalculatedRISK) to banks to accurately report their losses. For banks who don't count "losses" until two years after they happen--following the model of Freddie Mac--failure is a distinct possibility. And it's going to be some big banks, but especially small and regional banks--such as we have in our area.

But much of this is blah blah blah to the average citizen.

So here's a hard number that's important for BUYERS AND SELLERS:

We have more than 14 MONTHS of INVENTORY in our area.

http://tinyurl.com/5kpmyo