Fannie (FNM) and Freddie (FRE)

[HenryTo]

Both stocks bounced substantially since Friday afternoon and will most probably lead the next housing bull cycle, however muted it is (actually, the more muted the better, as long as the pipeline is growing). Now that the jumbo loan market is starting to freeze up as well, senators and regulators alike are entertaining the though of easing the caps of both quasi-government companies.

Following is courtesy of the WSJ:
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Big Fans for Fannie, Freddie Some Lawmakers See
One-Time Pariah Firms As Subprime Salvation
By JAMES R. HAGERTY
August 8, 2007; Page C1

The mortgage-market meltdown isn't over, but it already has produced two clear winners: Fannie Mae and Freddie Mac, the nation's biggest investors in home loans.

Until recently, politicians in Washington were arguing about how best to rein in the two giant government-sponsored companies, both recovering from accounting scandals and lapses in financial controls. Now, as worry about the housing market trumps accounting scruples, the political debate has shifted to whether Fannie and Freddie need to grow even bigger to buy more loans and calm mortgage investors.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

Fannie's shares gained 3.1% to close at $64.43 on the New York Stock Exchange yesterday, while Freddie was up 2.7% to $61.64.

The two stocks have held steady over the past month amid anxiety over mortgage defaults, while shares of Countrywide Financial Corp., the nation's largest home-mortgage lender, have fallen 27%.

Fannie and Freddie are benefiting because investors are still happy to buy the mortgage securities they create, backed by loans purchased from lenders scattered across the country. The two companies collect fees for guaranteeing the interest and principal payments on the loans backing those securities. Although Fannie and Freddie are private-sector companies, they were created by Congress to funnel money into housing, and investors assume that Congress would bail them out in a crisis.

Sticking With Uncle Sam

With loan defaults rising and house prices falling, investors now are shunning, at least temporarily, mortgage securities packaged by Wall Street firms and others that don't have any implied backing from Uncle Sam. That makes it hard for lenders to find buyers for loans that can't be sold to Fannie and Freddie. Regulations prevent them from buying loans of more than $417,000 on single-family homes, and they have stricter standards on down payments and verification of income than were imposed by Wall Street during the housing boom.


The result is a spike in rates on some types of loans that can't be sold to Fannie or Freddie, such as prime, 30-year, fixed-rate jumbo loans, those above $417,000. Yesterday, the average rate on such loans was 7.44%, according to a survey by financial publishers HSH Associates. That's 0.84 percentage point higher than the average rate on "conforming" loans, those that meet Fannie and Freddie's standards. Typically over the past decade, the premium paid for jumbo loans has been around 0.20 to 0.30 point.

Even middle-class people often pay $500,000 to $700,000 for a humdrum home in high-cost areas. So the higher rates on jumbo loans could be "devastating" for the housing market in some areas, says Michael Menatian, president of Sanborn Mortgage Corp., a mortgage bank in West Hartford, Conn.

As lenders recoil from riskier types of mortgages, "we're turning a lot of people away now," says Jeff Lazerson, chief executive of Mortgage Grader, a mortgage broker in Laguna Niguel, Calif.

Many investors hope that alarm over the housing market will induce Ofheo to ease restraints on Fannie and Freddie.

But Joshua Rosner, an analyst at the New York research boutique Graham Fisher & Co., describes as "mass delusion" the idea that they can save the day for investors exposed to billions of dollars of ill-advised home loans now heading toward foreclosure. For one thing, he says, Ofheo has required Fannie and Freddie to follow stricter standards, recently imposed by banking regulators, in assessing borrowers' ability to repay. So they can't buy up loads of reckless loans to speculators or people failing to pay bills.


Richard Syron, chief executive of Freddie, agrees that there are limits to what his company can do. "Neither we nor anyone else can buy at par loans that probably shouldn't have been made in the first place," he says.

Freddie's Limited Help

Mr. Syron says Freddie can provide funding to refinance many subprime borrowers stuck with loans due to reset to sharply higher monthly payments, but not most of them. In addition, he says, Freddie could help the market by buying and holding more mortgage securities packaged by Wall Street if the cap on its holdings rises.

Fannie and Freddie may be able to buy subprime mortgage securities at discounts that more than make up for the credit risk, Kenneth Posner, an analyst at Morgan Stanley, said in a research note. They also may be able to charge more for providing guarantees on securities sold to others, he said: "We can't imagine anyone complaining -- right now there's no other game in town."

The flight of other investors from the mortgage market "does show the role and the need" for Freddie and Fannie to act as steady providers of mortgage funding, Mr. Syron says. Still, he says, Freddie isn't gloating: "You don't want to take a lot of joy in other people's suffering."

Write to James R. Hagerty at bob.hagerty@wsj.com

[HenryTo]

Latest developments as of Sunday morning:

http://www.bloomberg.com/apps/news?pid=20601087&sid=ablYQ7pPEw9g&refer=home

[rffrydr]

The Freddie File:

http://www.ft.com/indepth/freddieandfannie
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Mauldin on GSEs (note last line misses the changing nature of these financials, the writedowns are being submerged in rights-down. This Treas. move just puts a point on it):

[HenryTo]

Breaking news - US Treasury to inject $15 billion into Freddie and Fannie in return for equity in the two GSEs, but still not totally confirmed. This plan should double the number of total common shares outstanding - but presumbly, the Treasury's "class" of shares would be senior to that of current common shareholders.

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4322440.ece

[rffrydr]

The Madman says Friday was a turn:

[rffrydr]

Some Options detail in context:

[rffrydr]

Nationalizes Indy Mac:

http://www.latimes.com/business/la-fi-indymac12-2008jul12,0,6071779.story

So there's the cover story...what they did NOT nationalize. Will is stop the spasm?
_________________
Today is the Tomorrow you worried about Yesterday!

[robo]

Fed Says No Talks With Fannie, Freddie About Loans (Update1)

By Scott Lanman

July 11 (Bloomberg) -- The Federal Reserve has not had any discussions with Fannie Mae and Freddie Mac about access to direct loans from the central bank, Fed spokeswoman Michelle Smith said.

``Federal Reserve officials are following the situation closely,'' Smith said in a telephone interview today. ``However, there have been no discussions'' with the companies ``about access to the discount window,'' she said.

Shares of the two largest U.S. mortgage-finance companies plummeted this week on concern they don't have enough capital to offset losses from the mortgage meltdown. The discount window offers direct loans to commercial banks at an interest rate that's now 2.25 percent, a quarter point above the Fed's benchmark rate.

Chairman Ben S. Bernanke and his colleagues opened the discount window to investment banks at the time of the collapse of Bear Stearns Cos. in March to alleviate the credit crisis.

Even if the Fed did provide emergency funding to Fannie Mae and Freddie Mac, it's ``not a solution'' for maintaining the companies' solvency, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. ``If it happens, it would only be a bridge to some other government solution,'' said Sack, a former Fed research manager.

`Various Options'

Fed and Treasury officials are discussing ``various options'' to help Fannie Mae and Freddie Mac, Senate Banking Committee Chairman Christopher Dodd said earlier today.

Reuters reported earlier that Bernanke told Freddie Mac's chief executive officer Richard Syron that the two government- chartered companies could take advantage of the discount window.

Smith said she was ``not prepared to discuss the range of options and alternatives being considered.''

Today, U.S. Treasury Secretary Henry Paulson signaled that a government takeover of Fannie Mae and Freddie Mac won't be necessary, saying they should continue as shareholder-owned companies with federal charters.

``Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are ``very important institutions'' and that he discussed market ``concerns'' with Paulson earlier today.

Dodd, a Connecticut Democrat, said at a press conference today that the companies are sound, and the ``facts don't warrant'' the negative reaction by investors.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: July 11, 2008 17:21 EDT

http://www.bloomberg.com/apps/news?pid=20602002&sid=aHRDpoqZEtmg&refer=markets

[HenryTo]

Bernanke opens discount window to the GSEs:
-----------------------------------------------------------------------------
Bernanke told GSEs they can use discount window: report

By Wallace Witkowski
Last update: 3:10 p.m. EDT July 11, 2008
SAN FRANCISCO (MarketWatch) -- Federal Reserve Chairman Ben Bernanke told Freddie Mac and Fannie Mae they can use the discount window, Reuters reported Friday, citing a source familiar with the matter. Bernanke's comments were made during a Thursday afternoon phone conversation with Freddie Chief Executive Richard Syron, according to Reuters. Shares of Freddie were down 1.8% at $7.86 and Fannie shares were down 21.7% at $10.33 in recent trading after both being down about 40% earlier in the day.

[rffrydr]

Take a look at their "house":

http://www.abcnews.go.com/Business/MarketTalk/wireStory?id=5329226
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Perversely, this may disincline market shorts across the weekend. I'm not betting on it either way....but the nationalization of the GSEs would put a fine point on housing's demise. Bear marked the end of the shadow banking system and credit freeze. Do we now need to pluck the root?
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

PIMCO's Bill Gross bought a significant amount of Fannie's debt earlier today. Following is courtesy of the WSJ. I also see the Federal Reserve or the Treasury's Exchange Stabilization Fund coming in and buying agency MBS or directly lending to the GSEs before there will be a government takeover.
----------------------------------------------------------------------------------
Mortgage Giants Face
Pressure Over Capital
By JAMES R. HAGERTY, GREGORY ZUCKERMAN and CRAIG KARMIN
July 11, 2008; Page A1

Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.

Shares in the two stockholder-owned, government-sponsored companies declined sharply yet again Thursday. Freddie shares dropped 22% to $8 in 4 p.m. composite trading on the New York Stock Exchange. Fannie fell 14% to $13.20. Both stocks are down more than 80% from a year ago and at their lowest closing levels in more than 16 years.

The declines have set off a raging debate on Wall Street over whether the companies, which are crucial to the battered housing market, will need a big cash infusion and possibly government help.

One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

Such a move would be a drastic step and its path is uncertain, in part because few know what specific financial situation would be a trigger.


"They need a lot more capital," said John Paulson, who heads the hedge-fund manager Paulson & Co. that has made billions betting the housing market would decline. He pointed to "growing worries" about the deterioration of securities backed by mortgages as more homeowners default and home prices fall. Meanwhile, some high-profile bond investors snapped up Fannie and Freddie debt, believing the government would never allow them to default.

Bill Gross, chief investment officer of Pacific Investment Management Co., the large Newport Beach, Calif., bond manager known as Pimco, said the firm bought a large amount of Fannie Mae debt Thursday. A default would set off "a firestorm of intolerable proportions," Mr. Gross said.

At a House hearing Thursday, Treasury Secretary Henry Paulson said the firms "are playing a very important and vital role." He added: "They touch 70% of the mortgages that are made in this country. They are a very important part of our economy, a very important part of our housing market."

Federal Reserve Chairman Ben Bernanke said the firms "are playing a critical role" in the mortgage market, but "I think they could do an even a better job if they were better supervised and better capitalized." Both the Fed and the Treasury are pressing Congress to pass legislation that would create a stronger regulator for Fannie and Freddie. The Fed and Treasury also have been pressuring Fannie and Freddie to raise more capital.

'Too Important'

Politicians in both parties expressed their confidence in the companies and pledged to take action if things worsen.


"Fannie Mae and Freddie Mac are too important to go under," said Democratic Sen. Charles Schumer of New York. "...If they need additional support, Congress will act quickly." But he added in an interview: "We're not at that stage. I hope and think it won't be needed."

A Treasury spokeswoman said: "As Secretary Paulson said today, we're not going to speculate about 'what ifs' on Fannie and Freddie. What we're focused on is legislative reform."

Congress created Fannie and Freddie to ensure money for home mortgages would be reliably available. Though the Treasury takes pains to say the U.S. government doesn't guarantee their debts, most investors believe the government would bail out the companies, if needed. That allows them to borrow money at lower interest rates, only modestly higher than those paid by the Treasury.

Fannie and Freddie own or guarantee about $5.2 trillion of U.S. home mortgages, or nearly half of those outstanding. Their ability to provide money for mortgages is vital to the government's efforts to shore up the slumping U.S. housing market.

A Freddie spokeswoman said the company has the capital it needs to "enable us to continue to support the nation's housing markets." A Fannie spokesman said the company's capital is well above the minimum required by law and "will allow us to fulfill our congressionally chartered mission now and in the future."

Bankers and analysts are discussing various possible ways that the government could prop up Fannie and Freddie if they are unable to raise capital on their own.

In an email sent to clients Thursday morning, Beth Hammack, who heads trading in Fannie and Freddie debt at Goldman Sachs Group Inc., said she sees "many good options" falling short of the government taking over the companies. Among them, she said, would be a purchase by the Fed of some of their debt or mortgage-backed securities. A spokesman for Goldman, which is advising Freddie on possible ways to raise capital, said the views were Ms. Hammack's and not necessarily those of the firm.

If things get bad enough, said Bob Napoli, an analyst at the securities firm Piper Jaffray & Co., the Federal Reserve could make large, 10-year loans to the companies "to make it clear that they have enough capital."

Other possibilities might include the Treasury buying stock in the companies. In an extreme situation, the government might have to take over the companies in a transaction that might leave little or nothing for existing shareholders.

Fannie and Freddie still might raise enough money from private investors and avoid the need for government support. An investment from a private-equity firm is another option, but one issue for them would be whether they can feel confident in their ability to assess the risks of these heavily regulated companies with huge exposure to the weak housing market. And their capital needs are so large that a typical-size private-equity injection might be insufficient.

Hard to Assess

"You could look at every asset they own and still not come away with a real view on what the risks are," said Joshua Siegel, managing principal at StoneCastle Partners LLC, a private-equity firm that invests in banks. "That's because there isn't enough historical evidence to know how these assets will perform because we've never seen a real-estate cycle like this before."

The vast majority of mortgages owned or guaranteed by Fannie and Freddie are prime, fixed-rate loans on which borrowers are current. As of April, Fannie said just 1.22% of the single-family loans it owns or guarantees were 90 days or more overdue, and Freddie's equivalent delinquency rate is 0.81%.

Yet the companies have recorded combined losses of $11 billion for the nine months ended March 31. That includes losses realized on the sale of foreclosed homes and provisions for future loan losses, as well as adjusting downward the value of mortgages and related securities. Further heavy losses are likely. Paul Miller, an analyst at Friedman Billings Ramsey & Co., said he doesn't expect the companies to be solidly back in the black until 2011.

One big problem is that the companies never have been required to hold much capital, partly because regulators and Congress used to believe that there wasn't much risk of wide-spread defaults on home mortgages. As of March 31, the companies reported combined capital of $81 billion, only about 1.6% of the mortgages they own or guarantee.

That leaves little cushion for absorbing losses and means they may have to raise large amounts of additional capital. Fannie raised $7.4 billion of capital in April and May through sales of common and preferred shares. Freddie has announced plans to raise $5.5 billion, perhaps in August after second-quarter results are announced.

Mr. Miller said they may need to raise an additional $15 billion apiece to cope with losses on the current wave of foreclosures. Other analysts, such as Mr. Napoli, said they doubt the capital needs will be so large. Much will depend on how much further house prices fall, which will help determine the extent of losses on foreclosed homes.

"Regulators, government officials and others can say they have enough capital, but Mr. Market doesn't believe it," said James Ellman, president of Seacliff Capital LLC, a $200 million hedge fund. "The market is telling us that neither Fannie nor Freddie have enough capital to cover the projected losses from their mortgage-insurance book of business." Mr. Ellman doesn't have a position in either company.

Firms Still Have Fans

Not everyone is giving up on Fannie and Freddie, however. Indeed, the mortgage companies have a legion of devoted fans, some of whom have been buying shares in recent months and now are suffering. Legg Mason Capital Management Inc. owned 50.2 million shares of Freddie as of the end of the first quarter, making it the second-largest shareholder, and the firm added 35.6 million shares during that quarter. A spokeswoman for the firm wouldn't comment on its current holdings.

Richard Pzena, who runs Pzena Asset Management, a New York firm that was the fifth-largest holder of Freddie and the ninth-largest holder of Fannie shares at the end of the first quarter, says his firm isn't selling the stocks.

"I've looked at this over and over again, and I don't see insolvency issues," he says. "It's a panic, for sure, and that itself can lead to problems, and Freddie has to raise capital, but there's no alarming rise in delinquency rates, losses" or other measures of the companies' health.

Bonds Hold Up

Fannie and Freddie's bonds haven't sold off to the same extent as their shares; by some measures they are implying less risk than in mid-March, when tensions in the credit markets peaked. "Given how much the shares have fallen, if these were any other financial institutions, their cost of financing would have gone up much more," said Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays Capital.

On Thursday, two-year agency bonds were yielding 0.78 percentage point over Treasury bonds; that gap is double what it was a year ago but analysts say the agencies' financing costs aren't prohibitively high. In the derivatives market, where traders buy and sell contracts that provide protection against bond defaults, the cost of insuring Fannie and Freddie debt has risen 20% this week alone. Still, that cost is a small fraction of what it cost to insure the debt of Bear Stearns Cos. in the days before the Wall Street firm was bought, with the aid of the Fed, by J.P. Morgan Chase & Co. in March.

[HenryTo]

Here is your story, rffrydr. Perversely, this "leak" should help tighten the spread on agency debt more over the next few trading days - as the market would be more than willing to lend to Freddie and Fannie given this effective taxpayer guarantee:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAbexDTdj_QM&refer=home

[HenryTo]

Right on - yield spreads on agency debt are still tighter than where they were in mid March, implying that it's still "business as usual" at the GSEs in terms of their ability to access cheap funding. The fear is over the equity only - not the debt and definitely not the agency MBSs.

As long as the GSEs' cost of capital remains relatively low, the government will not have to bail them out. As discussed in yesterday's commentary, the government, the Fed, the OFHEO, etc, are perfectly content to let them go on about their usual business and inflate their way out of their current troubles in 12 to 24 months time. At this point, only a general exit out of agency debt will require a bailout - and obviously, that will depend on the US housing sector and economy over the next few months. Stay tuned...

[rffrydr]

The implied govt. backstop here is what's pulling these shares to zero. After BearStearns we know exactly what that backup is.
_________________
Today is the Tomorrow you worried about Yesterday!