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

[rffrydr]

Here's one guy looking to build on failure:

[rffrydr]

Have to learn not to trust friday rallies. How much did we go into the weekend needing these guys to fail?
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Whole series of Buffet interview snippets on CNBC:

http://www.cnbc.com/id/15839263
_________________
Today is the Tomorrow you worried about Yesterday!

[diesel]

Buffett says game is over for Fannie and Feddie.

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

[HenryTo]

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

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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.

[HenryTo]

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

[HenryTo]

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

[HenryTo]

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.
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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.

[HenryTo]

Recent Wall Street Journal forecast survey putting the odds of a government bailout of the GSEs at 59%:

http://online.wsj.com/article/SB121864245359137157.html?mod=hpp_europe_whats_news

[HenryTo]

Gross believes the Treasury will need to directly inject equity into the GSEs - and sooner (in a couple of months) than later:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aWX8Gi89RN44&refer=home

[HenryTo]

Insiders assert that Freddie Mac CEO ignored several warning signs and recommendations leading up to the current crisis of confidence in the GSEs:

http://www.nytimes.com/2008/08/05/business/05freddie.html?_r=3&ref=business&oref=slogin&oref=slogin&oref=slogin

[HenryTo]

Larry Summers on the GSEs:

http://www.ft.com/cms/s/0/b150d388-5bf8-11dd-9e99-000077b07658.html

[HenryTo]

Hi Suomodo,

You're too kind as usual - I am just reporting what I am seeing.

I also highly appreciate and anticipate your running commentaries on the market and what you're currently thinking. They have helped crystalize my thinking as well!

Best regards,

Henry

[Suomodo]

[Rubedo]

http://www.bloomberg.com/apps/news?pid=20601087&sid=afW0hUrRUP54&refer=home

Freddie, Fannie Should Split, Not Get Aid, Faber Says (Update3)

By Carol Massar and Alexis Xydias

July 23 (Bloomberg) -- Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid, investor Marc Faber said.

``They should close down Fannie Mae and Freddie Mac or what they should do is split them into 10 different companies and let them run as private companies,'' said Faber, who forecast the so-called Black Monday crash in 1987, in an interview with Bloomberg Television from Chicago. ``What Freddie Mac and Fannie Mae should right away do is not obtain any federal aid, but issue additional shares'' to avoid using taxpayers' money in a rescue plan, he said.

Fannie Mae and Freddie Mac, which own or guarantee about half of the $12 trillion of U.S. mortgages, have fallen 31 percent and 41 percent respectively this month, on concern the companies have insufficient capital to cover writedowns and losses amid the mortgage-market collapse.

The U.S. Congress may vote today on a rescue plan for Fannie Mae and Freddie Mac after lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.

Fannie Mae gained $2.24 to $15.65 at 11:47 a.m. in New York. Freddie Mac added $1.07 to $10.77.

`Colossal Bust'

Faber said the ``world may already be in recession,'' and reiterated a prediction for a ``bust'' in global markets.

Markets may enter ``a vicious cycle on the downside'' whose worst scenario is a ``colossal bust with inflation,'' as central banks are unable to manage the economic slowdown and faster growth in prices.

Still, Faber forecast the Standard & Poor's 500 Index may climb about 5.7 percent from current levels, to 1,350. Oil may drop $30 a barrel to ``about'' $100 in the near term, he said, although the ``long-term'' prospect for oil prices is to remain ``tight.''

``In the last two months I've asked businesses around the world, and business is down everywhere, and slowing down very considerably,'' Faber said. ``A lot of earnings will start to decelerate. One sector that is quite vulnerable is technology.''

Stocks worldwide have tumbled this year, erasing about $11 trillion in value, as $467 billion in credit-related losses and accelerating inflation weigh on the outlook for economic and profit growth.

Oil is down 14 percent from a record $147.27 on July 11 in New York as the dollar strengthened and high prices curbed gasoline demand.