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:
------------------------------------------------------------------------
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

[rffrydr]

....But book was going south late summer and their mandate with it:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqSWVEDXgFUk
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Have not had to access the Fed facility. --so far so good.
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

LEHman's revenge: Freddie stuck with 400million in unpaid principle.


http://online.wsj.com/article/SB122178688144455099.html
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

More discussion on the GSEs and mortgage rates from the BCA:

http://www.bankcreditanalyst.com/public/story.asp?pre=PRE-20080909.GIF

[rffrydr]

Bears are pointing to the economy--it well beyond the "formalism" of mortgage rates and trying to pin housing.

Bulls are pointing to the economy--for all that has happened we're still growing. Just give us a decent ARM roll rate.

Greenspan today seemed surprised that we hadn't fallen off more--market taking that as a promis I guess.
_________________
Today is the Tomorrow you worried about Yesterday!

[Rubedo]

Not surprisingly, from what I've read so far, all the bulls, interventionalists, or Keynesians such as Bill Gross, Cramer, and Gavekal are bullish on the Fannie bailout. All the bears and Austrians aren't. Jim Rogers said he might short more depending on how much the markets rise. I don't think he got the chance to short more.

[rffrydr]

The Takeback has uncorked another long simmering worry. The CDS market has declared a "credit event" and will settle 1.5 trillion notional in "some new kind of auction process."

Should be interesting. Should be already worked out.
_________________
Today is the Tomorrow you worried about Yesterday!

[Suomodo]

[rffrydr]

Behind the bearishness in LEH today there is a greater, somewhat familiar, tone reasserting itself. This from Credit Suisse (courtesy Alphaville "Markets Live")

[dknoester]

Duarte's take on the latest developments:

"Fannie Mae and Freddie Mac were using accounting methods to "inflate" their capital position, and this seems to have been the final straw that pushed Treasury Secretary Hank Paulson to move in and seize control of the two mortgage giants, according to Bloomberg.

The financial markets responded quite favorably overnight to news of the seizure of control and the replacement of top management at the two government sponsored agencies that have a hand in backing over $5 trillion and 50% of the U.S. mortgage market. The terms of the "conservatorship" include "periodic capital injections" by the government, via the "buying (of) convertible preferred shares or warrants" reported Bloomberg citing sources familiar with the situation.

According to The Wall Street Journal: "There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn't survive in their present forms, and that any collapse would be devastating to the economy."

The Journal, in a detailed "fly on the wall" and very Woodwardesque atricle describes a process that took over several weeks and that involved Treasury Secretary Paulson, Fed Chairman Ben Bernanke, James Lockhart, head of the companies' regulator, the Federal Housing Finance Agency and others including a team of 40 Morgan Stanley bankers who were hired by the treasury to audit Fannie and Freddie.

The Morgan Stanley team was a key player in the developments, as their investigation and maneuvering led to the conclusion at Treasury "that the two companies had lost the confidence of the markets and couldn't survive as currently structured."

According to The Journal, a key meeting was held on August 18, 2008, in Mr. Paulson's conference room, with 30 people attending. During that meeting, the Morgan Stanley team gave Paulson the following news: "The companies were facing a deep financial hole. While their capital might meet the letter of regulatory requirements, they still might not have enough to cover their expected losses," determining "that the companies were in need of as much as $50 billion," over the next 18 months.

Morgan Stanley gave Paulson three potential options to deal with the problem: "receivership; a less aggressive option called conservatorship, in which the companies' regulator, the FHFA, would essentially run the companies' operations; and the even more incremental step of having the companies try to raise money on their own."

More work on the details was done at the Fed's annual powwow in Jackson Hole, Wyoming, with Bernanke and Paulson involved along with others, while "The big decision came together during a marathon series of meetings over Labor Day weekend at Treasury's offices. A dozen Treasury officials, including Mr. Paulson, gathered together with Mr. Bernanke, Fed Governor Kevin Warsh, the Fed general counsel and a top banking official and Mr. Lockhart's team."

Yet, despite the allegations of accounting irregularities, according to the Los Angeles Times, Mr. Paulson "refused to comment on reports that investment advisors hired by Treasury had uncovered accounting irregularities at Freddie Mac that inflated the amount the company had set aside as a financial cushion in case of trouble."

So the questions of how it happened remain open. According to the Associated Press: "Mortgage giants Fannie Mae and Freddie Mac — despite their collection of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies, particularly Freddie Mac, didn’t raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices."

Conclusion

We've seen this movie before, with different titles, such as Enron, Worldcom, and in past decades with Wall Street names like Drexel Burnham.

To be sure, the story about Fannie and Freddie has not been totally rooted out, and it is possible that once the details are available, there may not be any similarity between previous big company crashes on Wall Street and what happened at Fannie and Freddie.

So, just work with us on this for now. Assuming, hypothetically, that Fannie and Freddie's issues developed along the lines of those big companies that have crashed and burnt in the past, there is the potential for fraud, or at least the intention to deceive the public here.

The mention of "accounting" maneuvers by the inevitable anonymous sources surely raises that possibility, and is likely to be the story that develops here in the next few weeks.

The fact is that Fannie Mae had an accounting scandals in the past, that resulted in the ouster of former CEO Franklin Raines.

To be sure, this is the political season, and anything is possible. But a quick look at the blogosphere, reliable or not, partisan or not, and certainly having no connection to this publication, suggests that this issue will be one that has some legs, especially for the Obama campaign, as some are, rightly or wrongly, trying to connect Franklin Raines' past issues at Fannie Mae to the Obama campaign, where Mr. Raines may be a high level advisor according to one blogger (http://www.spectator.org/dsp_article.asp?art_id=13841).

So what does this mean for the markets? Well, today is likely to get a good start. More important is how things end."

DK
_________________
Be careful while stuffing your pockets not to lose your pants!!

[dknoester]

Duarte's take on the latest developments:

"Fannie Mae and Freddie Mac were using accounting methods to "inflate" their capital position, and this seems to have been the final straw that pushed Treasury Secretary Hank Paulson to move in and seize control of the two mortgage giants, according to Bloomberg.

The financial markets responded quite favorably overnight to news of the seizure of control and the replacement of top management at the two government sponsored agencies that have a hand in backing over $5 trillion and 50% of the U.S. mortgage market. The terms of the "conservatorship" include "periodic capital injections" by the government, via the "buying (of) convertible preferred shares or warrants" reported Bloomberg citing sources familiar with the situation.

According to The Wall Street Journal: "There was no dramatic trigger, nor was there fear of imminent collapse. Instead, the sweeping government intervention stemmed from a growing realization by Treasury and Federal Reserve officials that the two companies couldn't survive in their present forms, and that any collapse would be devastating to the economy."

The Journal, in a detailed "fly on the wall" and very Woodwardesque atricle describes a process that took over several weeks and that involved Treasury Secretary Paulson, Fed Chairman Ben Bernanke, James Lockhart, head of the companies' regulator, the Federal Housing Finance Agency and others including a team of 40 Morgan Stanley bankers who were hired by the treasury to audit Fannie and Freddie.

The Morgan Stanley team was a key player in the developments, as their investigation and maneuvering led to the conclusion at Treasury "that the two companies had lost the confidence of the markets and couldn't survive as currently structured."

According to The Journal, a key meeting was held on August 18, 2008, in Mr. Paulson's conference room, with 30 people attending. During that meeting, the Morgan Stanley team gave Paulson the following news: "The companies were facing a deep financial hole. While their capital might meet the letter of regulatory requirements, they still might not have enough to cover their expected losses," determining "that the companies were in need of as much as $50 billion," over the next 18 months.

Morgan Stanley gave Paulson three potential options to deal with the problem: "receivership; a less aggressive option called conservatorship, in which the companies' regulator, the FHFA, would essentially run the companies' operations; and the even more incremental step of having the companies try to raise money on their own."

More work on the details was done at the Fed's annual powwow in Jackson Hole, Wyoming, with Bernanke and Paulson involved along with others, while "The big decision came together during a marathon series of meetings over Labor Day weekend at Treasury's offices. A dozen Treasury officials, including Mr. Paulson, gathered together with Mr. Bernanke, Fed Governor Kevin Warsh, the Fed general counsel and a top banking official and Mr. Lockhart's team."

Yet, despite the allegations of accounting irregularities, according to the Los Angeles Times, Mr. Paulson "refused to comment on reports that investment advisors hired by Treasury had uncovered accounting irregularities at Freddie Mac that inflated the amount the company had set aside as a financial cushion in case of trouble."

So the questions of how it happened remain open. According to the Associated Press: "Mortgage giants Fannie Mae and Freddie Mac — despite their collection of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst. The companies, particularly Freddie Mac, didn’t raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices."

Conclusion

We've seen this movie before, with different titles, such as Enron, Worldcom, and in past decades with Wall Street names like Drexel Burnham.

To be sure, the story about Fannie and Freddie has not been totally rooted out, and it is possible that once the details are available, there may not be any similarity between previous big company crashes on Wall Street and what happened at Fannie and Freddie.

So, just work with us on this for now. Assuming, hypothetically, that Fannie and Freddie's issues developed along the lines of those big companies that have crashed and burnt in the past, there is the potential for fraud, or at least the intention to deceive the public here.

The mention of "accounting" maneuvers by the inevitable anonymous sources surely raises that possibility, and is likely to be the story that develops here in the next few weeks.

The fact is that Fannie Mae had an accounting scandals in the past, that resulted in the ouster of former CEO Franklin Raines.

To be sure, this is the political season, and anything is possible. But a quick look at the blogosphere, reliable or not, partisan or not, and certainly having no connection to this publication, suggests that this issue will be one that has some legs, especially for the Obama campaign, as some are, rightly or wrongly, trying to connect Franklin Raines' past issues at Fannie Mae to the Obama campaign, where Mr. Raines may be a high level advisor according to one blogger (http://www.spectator.org/dsp_article.asp?art_id=13841).

So what does this mean for the markets? Well, today is likely to get a good start. More important is how things end."

DK
_________________
Be careful while stuffing your pockets not to lose your pants!!

[rffrydr]

They suspended dividend payments--which make these a great LEAP buy if you think these entities will be making money next year, when they will "have to" reinstate it.

Short term, a back-handed blow to banks balance sheets. But now they have the means (rates) to go out and earn it.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Fannie and Freddie Preferreds:
----------------------------------------------------------------------------------
Fannie, Freddie preferreds swoon after US bailout
Mon Sep 8, 2008 10:24am EDT

NEW YORK, Sept 8 (Reuters) - Preferred shares of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) lost more than 70 percent of their value on Monday after the government seized control of the two mortgage finance companies this weekend.

Two recently issued preferred shares from Fannie and Freddie, which were originally priced at $25, were now trading below $4 on the New York Stock Exchange.

[Suomodo]

Will the GSE bail out inspire the people to push money into the markets other than short term money?

Today we get a huge gap at opening...

Key points to watch according to me are
1) How much of that will be simple short covering - P/C ratios
2) What will be the reaction of credit markets - spreads et al
3) what will the Mutual funds flows look like on Friday

I positive from short term perspective we can simply wait until 22 Sept for postexspiration call buyers or even later on begining of October

If negative the rally is a reason to sell - short term.

Long term - never sell stocks , just buy the dips

[rffrydr]

In the end the Treas. couldn't wait cause it looked like GSEs just might make it (up ~10% on friday and they cloaked it with beancounters!). The market wanted...demanded more.

Nothing is obvious.

There have been other times like this: the "bond vigilantes" in the Clinton years come to mind.
_________________
Today is the Tomorrow you worried about Yesterday!