July 7, 2008
JustQuotes: You Had Better Watch Your Fannie (As Well As Freddie)
“Freddie Mac and Fannie Mae plunged in New York trading and their credit-default swaps rose as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.”
“As mortgage delinquencies grow at a record pace, the companies likely will take further losses, [Deutsche Bank credit strategist John Tierney] said. Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to RealtyTrac Inc., a real estate database in Irvine, California. Home prices in 20 U.S. metropolitan areas fell 15.3 percent in April by the most on record, S&P/Case-Shiller home-price index.”
"Spreads between 10-year Treasuries and bonds backed by Fannie Mae reached a 22-year high of 238 basis points on March 6. An increase boosts the cost of new mortgages for the most creditworthy consumers. A basis point is 0.01 percentage point."
∙ Freddie Mac, Fannie Mae Plunge on Capital Concerns [Bloomberg]
∙ Fannie Mae To Market: It’s Not Getting Better, But Rather Worse [SocketSite]
∙ April S&P/Case-Shiller: San Francisco MSA Declines Across All Tiers [SocketSite]
∙ Agency Mortgage-Bond Yield Spreads Rise on Potential Bank Sales [Bloomberg]
First Published: July 7, 2008 11:45 AM
Comments from "Plugged In" Readers
While Fannie and Freddie will likely survive it looks like lender IndyMac is imploding, right now. Trading on Indymac stock has halted and it looks like 4k employees are about to be out of a job.
Posted by: badlydrawnbear at July 7, 2008 12:51 PM
BDB is right. Implosion imminent at Indymac.
Posted by: scurvy at July 7, 2008 12:59 PM
Not so sure about Fannie and Freddie, at least not in their current guise. Without the FAS 140 exemption, FNM and FRE would need to raise ~$75 billion in new capital. There isn't enough dumb money on this planet to catch a falling knife that large. Well, at least not in the private sector....not with the annual losses they're posting.
In any case, a big bailout and/or restructuring for both is still on the horizon IMO. I won't begin to speculate on what it will look like, who will implement it, or when it will happen. But I am pretty sure who will end up paying for it.
Posted by: Dude at July 7, 2008 1:01 PM
Fannie and Freddie will get an exemption from FAS 140, so that's not an issue IMO.
In the end, it is my OPINION that Fannie and Freddie will always exist in some form. However, it is also my OPINION that "some form" will be as nationalized corporations (ie.e as governmental organizations). stockholders are starting to realize that they will be wiped out if/when these firms go BK (the Federal implicit gaurantee does not apply to stakeholders).
Fannie and Freddie's business model is flawed. they are giving below-market mortgage rates on depreciating assets. This is guaranteed to cause losses. It is also, incidentally, the REASON that they were created: to be the lenders who add liquidity when nobody else will.
Thus, when all other firms are pulling out of the mortgage market Fannie/Freddie are ramping up their activities (I've heard estimates that they are about 80% of the mortgage market now).
Fannie/Freddie enjoy the benefits of being GSE's on the way up. And now they're feeling the pain.
the practical aspect of this news, however is this: there will be no quick return of easy lending for mortgages (low rates or low downpayments etc). lending will continue to tighten more and more and more over the medium term. Credit events take years to play out.
if Fannie and Freddie (with government subsidized rates) can't give mortgages profitably at current rates, how will BofA, Wells, WaMu, etc? the answer: they can't.
This is why anybody thinking we'll get rapid appreciation in RE any time soon is completely in error, because they don't understand how the mortgage market works. But I've beat this drum enough.
Posted by: ex SF-er at July 7, 2008 2:01 PM
although we have all known for some time that Indymac is a dead man walking and soon to collapse, I have not seen any official press from IMB stating this to be the case.
The info thus far is still rumors, although it is most likely accurate. I would assume that we will know more in the next few days.
And I'd guess that FDIC will take over Indymac later this week (specifically Friday) but that is just a guess.
anyway, I've looked for official confirmation of Indymac BK/FDIC action and haven't found it yet, although starting yesterday we all heard about the impending cessation of mortgage writing from that firm.
Posted by: ex SF-er at July 7, 2008 2:04 PM
The statement from Indymac.
Posted by: badlydrawnbear at July 7, 2008 2:19 PM
No. None of this is true.
How do I know?
The bankers (who were raising capital at the time) all said "the worst is past" at least 3 months ago. Other than to make it easier for them to raise capital, and therefore, survive, why would they have lied?
Posted by: tipster at July 7, 2008 2:29 PM
Fannie Mae used to be a government entity, founded during the Depression to provide liquidity in the mortgage markets. I guess we're back to the future. Eerie how the financial markets of the 2000s are reprising the 1930s. The Fed is running out of tricks. The taxpayers will really pay big on this one (but the shareholders are going to lose even bigger in terms of percentage lost).
Locally, this will all just reduce the pool of qualified buyers even further as lending continues to tighten -- the most significant factor affecting the SF market as far as I can tell.
Posted by: Trip at July 7, 2008 2:47 PM
Maybe they could be used to dispose of all the bad loans and assets. RRTC: Return of RTC, because RTC needs no revenge. Then bury everything and never speak of them again.
Posted by: Mole Man at July 7, 2008 2:54 PM
I remember March very well. Most indices retraced the january lows and everyone shouted "double bottom turnaround!!!". And the markets went on a reprieve.
Then came June which proved yet again that there's no such thing as a tripple-bottom turnaround.
Preserve your capital. It will buy more and more with time apart from food and energy. Welcome to the deflation era.
Posted by: San FronziScheme at July 7, 2008 2:58 PM
so now we must wait and see if FDIC takes over the bank (extremely likely IMO, but not until the weekend).
on a side note, it is very difficult thing to see 4,000 people lose their jobs, even if those jobs are considered "unproductive". Keep the families in your hearts and minds.
Posted by: ex SF-er at July 7, 2008 3:15 PM
Fannie and Freddie continue to plunge. It looks like a real death spiral at this point -- lower stock price increasing the costs to raise needed capital, which is further depressing the stock price. When this finally hits the fan (and it appears to be a fait accompli and not far away), it will make the August 2007 mortgage crunch seem like the good old days. Those with big, big down payments should be okay, but any other buyer may want to lock in and close as quickly as they can because loans will be harder to get for a while until the government bailout (in some unknown form) calms things.
Posted by: Trip at July 10, 2008 7:10 AM