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Fannie (FNM) and Freddie (FRE)
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Author Fannie (FNM) and Freddie (FRE)
HenryTo
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PostPosted: Wed Aug 08, 2007 2:50 am    Post subject: Fannie (FNM) and Freddie (FRE) Reply with quote

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
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rffrydr
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PostPosted: Wed Sep 03, 2008 10:44 pm    Post subject: Reply with quote

A new kind of "snyergy":

http://dealbook.blogs.nytimes.com/2008/09/02/and-they-could-call-it-frannie/

It would probably work if the market reaction would'nt force an early abortion.
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PostPosted: Tue Sep 02, 2008 9:04 pm    Post subject: Reply with quote

Fitch took the rally off (before NAS downgrades APPL etc) saying GSEs won't be profitable this year or next.

http://www.reuters.com/article/marketsNews/idUSN0239743020080902
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PostPosted: Sat Aug 30, 2008 10:23 am    Post subject: Reply with quote

Some fear mongering from this week's Mauldin:

Quote:
.... There is $36 billion in preferred shares as of June 2007. Then there is $19 billion in subordinated debt. These firms back $5.2 trillion in mortgage securities. As an aside, that means even a 1% loss from foreclosures would mean a $50 billion portfolio loss. Care to make an over/under wager on a 1% loss by this time next year? I don't think I would want the under.

Gretchen Morgenstern reported last week that there are - drum roll - $62 trillion (with a "T") in credit default swaps written against Fannie and Freddie debt, or somewhere near 12 times the actual debt. Even if you cut this in half - because technically, when a buyer and a seller enter into a single transaction they create twice the value of the transaction in credit derivatives - this is a huge sum, far out of proportion to the underlying assets. More on this later.

The team at Morgan Stanley has a very interesting problem to solve. It is not just about putting $25 to $50 billion into Fannie and Freddie (assuming that would be enough). If that's all it was, just issue preferred shares, wipe out the current shareholders and, as the smoke cleared in a few years, even with less leverage the actual value of the two companies might actually approach that number and some private equity firms could take out the US taxpayer. But it is not that simple.

What do you do with the current preferred shares? A significant portion is held by banks in their capital base. JP Morgan Chase just wrote down $600 million in Fannie and Freddie preferred shares this week. Many other banks will be doing so as well. As noted last week, there are banks that have more than 20% of their capital base in these shares. In today's current environment, do we want to deal with the costs to the FDIC of even more failed banks? And even if you don't force a bank into outright failure, you at best limit its ability to function as an efficient market lending agency to local businesses and consumers.....


Is this the "muddle-through" Mauldin?
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PostPosted: Thu Aug 28, 2008 2:17 pm    Post subject: Reply with quote

Well, we're a long way from monday, coming in on a general malaise that the GSEs made their bond and did NOT make their way into the govt.'s pocket. Now we've got to wait three quarters for insolvency? Who's got the time! The inversion of values is a sign of a powerful trend...and, by that same power, its proximity to a reversal.

Now we've got MBIA doing FGIC work...and CDOs (ssh) going longer and stronger. Low volume in the summer going into one very bullish seasonal fronting Labor Day. We'll see if today's gap can give us a break.
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PostPosted: Wed Aug 27, 2008 6:34 am    Post subject: Reply with quote

Profit Margins kick in:

http://www.bloomberg.com/apps/news?pid=20601087&sid=apmMPC6KnAtI&refer=home
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PostPosted: Wed Aug 27, 2008 12:33 am    Post subject: Reply with quote

Corzine commenting on the GSEs and Paulson's position. We could very well see another Goldman alum at the SecTreas position should Obama be elected into the Presidency.
-----------------------------------------------------------------------------------
New Jersey governor wants larger gov't role for Fannie
Tue Aug 26, 2008 11:55pm EDT

By Corbett B. Daly

DENVER (Reuters) - The U.S. government should eliminate the hybrid structure of mortgage giants Fannie Mae and Freddie Mac and fully back them with taxpayer funds, New Jersey Gov. Jon Corzine said on Tuesday on the sidelines of the Democratic National Convention.

"I don't think we can continue with the schizophrenic view that we have today, sort of part-public company, part-private company, where the leaders of the company do well when things are going well but then the government and the public and the taxpayer has to bail them out when it goes bad," said Corzine, the former chief executive of Goldman Sachs.

Initially a major backer of Sen. Hillary Clinton, he is now backing candidate Barack Obama.

Asked in a Reuters video interview about a possible government takeover of the two mortgage giants, Corzine said Treasury Secretary Henry Paulson may be forced to make that move. Fannie Mae and Freddie Mac are publicly traded firms that are implicitly backed by the government.

"The fact is that we have to have a clear definition of what the mission of Freddie and Fannie is and if it is to serve the public than it ought to be owned by the public where the risk and rewards are controlled by the public," he said.

INTENSE SCRUTINY

A Citigroup analyst earlier in the day said the two GSEs have enough capital to absorb probable losses through the end of the year, reducing the need for emergency government support.

Still, the companies have come under intense scrutiny over the past few months on investor speculation that mortgage losses would cause shortfalls in capital, and lead to a government bailout. Fannie Mae and Freddie Mac shares have tumbled since May with analysts contending a taxpayer-funded rescue could leave shares worthless.

Both companies have repeatedly increased forecasts for losses or the depth of the housing slump, fueling concerns that they are not in control of their businesses.

Their increased importance to the overall health of the housing market -- they own or guarantee nearly half of all U.S. mortgages -- has raised pressure on policy-makers to intervene before they lose access to capital markets.

Fannie Mae and Freddie Mac are the nation's two largest sources of mortgage finance, and Washington has increasingly relied on them to nurture the housing market as banks with Wall Street ties have recently shied away from it.

Corzine has been mentioned as a possible Treasury Secretary in an Obama administration, though he told Reuters: "No, no, no, I love my job as governor of the state of New Jersey."
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rffrydr
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PostPosted: Tue Aug 26, 2008 11:07 am    Post subject: Reply with quote

Intervention provokes "gray area" in CDS market:


http://www.bloomberg.com/apps/news?pid=20601087&sid=aH.H8Wh0e5B8&refer=home
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PostPosted: Mon Aug 25, 2008 5:40 pm    Post subject: Reply with quote

Here's one guy looking to build on failure:


Quote:
The GSEs Are Still at Sea

By Jim Cramer
RealMoney.com Columnist
8/25/2008 8:20 AM EDT
Click here for more stories by Jim Cramer Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW


What are they going to do about the preferreds? Are they going to let them go down the drain? Are they going to keep current management? What are they going to do to reassure foreign governments about the obligations.




Don't worry. We will know this weekend.

Oops.

That's how we left last Friday, with an understanding that the Treasury knows that every day it waits to take over Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take)is a day when things get worse, when the nation's credibility darkens -- as this is sovereign debt's repository -- and when rates can't go down.

But the Treasury's not like what we think it is. The Treasury wants to wait for a collapse; it wants everyone to know that Fannie and Freddie are history because it is afraid. It doesn't want to be interventionist, and if it does, it wants the people who run Fannie and Freddie gone, and yet it doesn't' really know how to do it until we have total collapse. Then it has the cover of total collapse and doesn't have to say it intervened or bailed out or whatever it is so worried about.

Meanwhile, the whole market pays for the Treasury's purposeful indecision, and we can't get a bottom, which is, alas, the root of all evil and trumps the earnings for all but PepsiCo (PEP - commentary - Cramer's Take) and General Mills (GIS - commentary - Cramer's Take), or at least it seems so. Enough people thought Treasury would enact its secret plan this weekend that there is a letdown today, a letdown that could only be counteracted by oil crushing through $110, which will be hard to achieve.

So we stay in limbo and bet that Fannie and Freddie common get crushed by the shorts, which then causes worry in very solvent and good paper (i.e., the mortgages that Fannie and Freddie package) as well as the very bad paper (i.e., the preferreds). A risk taker buys Fannie and Freddie's senior debt. I don't know anyone who thinks that will be wiped out, but everything else is so up in the air that you know it will pollute the market as surely as the post-Olympic industrial China pollutes the air over Beijing.

At the time of publication, Cramer was long PepsiCo and General Mills.


....Only they made their bond. [edit]And look to make their year.

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

No easy money yet.
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PostPosted: Mon Aug 25, 2008 1:05 pm    Post subject: Reply with quote

Have to learn not to trust friday rallies. How much did we go into the weekend needing these guys to fail?
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PostPosted: Fri Aug 22, 2008 10:10 am    Post subject: Reply with quote

Whole series of Buffet interview snippets on CNBC:

http://www.cnbc.com/id/15839263
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PostPosted: Fri Aug 22, 2008 6:53 am    Post subject: Reply with quote

Buffett says game is over for Fannie and Feddie.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTMSz3VoUqu0&refer=home

Quote:
Fannie and Freddie mispriced their products and ``kept existing because they had the federal government behind them,'' Buffett said. Berkshire had been among the largest holders of Freddie until about 2001, when it became apparent the company wasn't being run well, he said.


http://www.reuters.com/article/topNews/idUSN2237903020080822?pageNumber=1&virtualBrandChannel=0

Quote:
"They're too big to fail," Buffett said. "That doesn't mean that the equity can't get wiped out, and it almost has. In a practical sense, as institutions, they don't have any net worth.... People who own their insured mortgages or own their debt, nothing is going to happen to them. The equity and preferred stock is another question." He forecast that "you'll see some action fairly soon" to support the companies, but that he has not been formally approached to help out in any bailout.


Also interestingly



Quote:
He also said he traveled with Bill Gates, founder of Microsoft Corp., to a Canadian site for extracting oil from tar sands, though an investment isn't imminent. Buffett said oil has ``changing dynamics because there's not a buffer for supply like there was'' a few years ago.

Buffett has been seeking acquisitions to put some of Berkshire's idle cash to work and toured Europe earlier this year to find candidates. He said today that he's been getting more ``distress'' calls than real opportunities, and that he's been referring callers to sovereign wealth funds, which he characterized as ``innocent money.''

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PostPosted: Wed Aug 20, 2008 1:30 pm    Post subject: Reply with quote

In retrospect, it now looks like his prior "end-of-the-quarter prediction" was too optimistic.

----------------------------------------------------------------------------------
Gross: GSE shares reflect gov't bailout likely-CNBC

NEW YORK, Aug 20 (Reuters) - Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac's (FRE.N: Quote, Profile, Research, Stock Buzz) depressed shares reflect the likelihood that the U.S. Treasury will bail out the giant mortgage-finance companies, wiping out shareholders, Bill Gross, chief investment officer of Pimco or Pacific Investment Management, told CNBC television on Wednesday.

"You know at $3 or $4 dollars per share...in effect, the market is valuing both of these companies at zero," Gross, who manages the $130 billion Pimco Total Return fund.

Investors still face hundreds of billions of dollars of losses if U.S. house prices decline by another 10 to 15 percent, Gross said.

The U.S. Treasury will probably be forced to buy a minimum of $15-20 billion of preferred shares in each Fannie and Freddie to help shore up their capital, he said.
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PostPosted: Wed Aug 20, 2008 10:23 am    Post subject: Reply with quote

At the rate things are going, we could very well see a bailout immediately after Labor Day weekend (August 30th to September 1st):

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6lKVdmsT42E&refer=home
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PostPosted: Tue Aug 19, 2008 10:36 pm    Post subject: Reply with quote

With over $200 billion in debt scheduled to be rolled over in the next six weeks, there is a good chance Treasury will bail out the GSEs before the end of this quarter:

http://www.bloomberg.com/apps/news?pid=20601087&sid=azlybEsIURmA&refer=home
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PostPosted: Mon Aug 18, 2008 9:48 am    Post subject: Reply with quote

Looks like the GSEs blew it, once again. They had every chance to raise capital immediately after the Treasury's backstop and after the short-selling rule was implemented. We talked to several money managers and the majority of them rated the GSEs as their "best buys" at that time. They could've easily raised $15 billion as recently as two weeks ago. With the Barron's article over the weekend, I think it is over.
---------------------------------------------------------------------------------
Fannie, Freddie subordinated debt CDS hit record
Mon Aug 18, 2008 11:41am EDT

NEW YORK, Aug 18 (Reuters) - The cost to insure the subordinated debt of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) hit new highs on Monday, a day after Barron's reported an increasing likelihood the U.S. Treasury may essentially take over the mortgage finance companies.

Credit default swaps on Fannie Mae and Freddie Mac's subordinated bonds each widened by around 27 basis points to around 305 basis points, or $305,000 per year for five years to insure $10 million in debt, according to Markit Intraday.
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