Feds take over Fannie, Freddie

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eagleisland
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Feds take over Fannie, Freddie

[url=http://www.nytimes.com/2008/09/06/business/06fannie.html?hp]Story here.[/url]

FYI, the WSJ has a [url=http://online.wsj.com/article/SB122064650145404781.html?mod=hps_us_whats... slightly less hysterical article [/url] on the subject (subscription may be required). We'll see who's right. Meantime, not great news for anyone holding equity in either company.

Naran
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Feds take over Fannie, Freddie

[quote][b]Mortgage giants face US takeover[/b]
[i]Bailout of Fannie Mae and Freddie Mac could cost taxpayers tens of billions[/i]
By Stephen Labaton and Andrew Ross Sorkin
New York Times News Service / September 6, 2008

WASHINGTON - Senior officials from the Bush administration and the Federal Reserve yesterday informed top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, that the government was preparing to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.[/quote]

[url=http://www.boston.com/business/articles/2008/09/06/mortgage_giants_face_...

mainemom
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Feds take over Fannie, Freddie

This will make Jim Cramer happy.

rklindell
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Feds take over Fannie, Freddie

Now they won't be able to make big campaign contributions to Democrats any more!

charlie neville
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Feds take over Fannie, Freddie

And now the taxpayers can fund another government bailout of a failed for profit business.

charlie

Dan Billings
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Feds take over Fannie, Freddie

Charlie: You are a business person. If the government seized your business to avoid the negative consequences of your business failing on your customers and creditors -- and you lost all your equity in the business as a result -- would you really consider it a "bailout"?

These two companies have such a major role in the economy, we would all pay the costs of a failure if the government did not take action. Credit would further tighten and banks could fail if their bonds became worthless.

rklindell
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Feds take over Fannie, Freddie

Both companies were created by an act of Congress and they opperate with the presumed backing of the US Government. They really aren't private businesses.

Steven Scharf
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Feds take over Fannie, Freddie

What is the real consequnce to the average person if they fail. Either you do not have a mortgage, so why care or you have a Fannie Mae/Freddie Mac mortgage and you will still make payments as before.

Yes, if you want to borrow money there are two less sources, but they really have not been making loans of late so that is not of a consequence.

On a separate note, there was an article that noted that almost 10% of all mortgages are in deliquency right now. Almost being 9%. We know more folks are having trouble, but if less mortgages are being written and people are in the regular course of business are paying off their mortgage either after the term is up or because they are cashing out, than naturally that percentage will creep up.

Side note, there are about 1.3 million people, 600,000 households with 145,000 morgates in Maine. Just over 10% of the total population and 24% of the households. At most 200 of those mortgages have been totally foreclosed on this year.

Steven Scharf
SCSMedia@aol.com

Reaganite
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Feds take over Fannie, Freddie

[quote]What is the real consequnce to the average person if they fail. Either you do not have a mortgage, so why care or you have a Fannie Mae/Freddie Mac mortgage and you will still make payments as before.[/quote]

If you do not have a mortgage, the failure of Fannie and Freddie would make it a lot more difficult than it currently is to obtain one. The vast majority of banks, savings and loans, and even some credit unions sell their loans to Fannie and Freddie, and thus they have access to capital funding to write more mortgages. If those two major sources of funding dry up, so will the ability of banks to write mortgages.

[quote]Yes, if you want to borrow money there are two less sources, but they really have not been making loans of late so that is not of a consequence.[/quote]

Way off. Fannie and Freddie are two sources of capital on the secondary market. They don't make loans. They buy them from banks. If they were to fail, borrowers would have hundreds of less sources of mortgages, as most banks don't have the capital on their balance sheets to make mortgage loans unless they have the ability to sell those loans on the secondary market and replentish their capital. This replentishment allows them to make more loans to more people. That is why Fannie, Freddie and Ginnie Mae exist.

The difference is that if ABC Bank fails, theoretically only ABC Bank's potential borrowers are impacted. And those potential borrowers could obtain a mortgage elsewhere. If the two largest players in the secondary market were to fail, ABC Bank would have limited access to funding, but so would almost all other banks. The mortgage market would dry up even worse than it has.

So, if Fannie and/or Freddie fail, it really is a major consequence. Banks could turn to the Federal Home Loan Bank system for capital, but the FHLB system isn't set up to provide the amount of funding that would be necessary to make up for what Fannie and Freddie provide. They could also turn to private investors for loan sales, but since the subprime debacle, the number of private investors in the secondary market has dramatically decreased.

Keep in mind that the primary mortgage market consists of lenders and borrowers. The secondary market consists of buyers and sellers of loans from the primary market. That's the difference.

mainemom
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Feds take over Fannie, Freddie

To take Reaganite's comment one step further:
When mortgages are relatively more scarce, there are fewer buyers in the housing market and home values fall.
Some argue that home prices needed to fall because prices have been artificially high due to irrationally easy credit.
I get that.
But meanwhile, the wealth of the typical American is mostly tied up in his home.
On paper billions upon billions of dollars in wealth has been lost to the economy as home prices have plummeted.

Dan Billings
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Feds take over Fannie, Freddie

To add to Reaganit;e response, if they fail, the banks that hold their bonds will lose a hige amount of money. That could result in more bank failures. The taxpayers will pick up the costs of those failures.

Roger Ek
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Feds take over Fannie, Freddie

Dan Billings thinks:

"These two companies have such a major role in the economy, we would all pay the costs of a failure if the government did not take action."

We will all pay the consequences now for sure and it's trillions, not billions. These companies were allowed to create money out of nothing with no collateral to back it up. Even if a property is foreclosed upon the value of the property can be far less than the amount owed. The taxpayers are on the hook for the missing funds.

People are driving less so the federal highway fund is broke. We have inadequate federal money to maintain our infrastructure. I worote this in another post yesterday;

""Highway Trust Fund Is Nearly Out of Gas "
Fannie Mae about to be liquidated
Freddie Mac about to be liquidated
Merrill Lynch about to be taken over.
Red China about to quit funding our government. "

If the Red Chinese don't bail out Fannie Mae and Freddie Mac the feds have two options:

1. Raise taxes

2. Print money out of nothing.

The second option is what the lenders were doing anyway. I believe you'll see our government start to issue its own bonds or US treasury notes rather than federal reserve notes. The European banks want to audit the fed. That would be interesting to watch. Our economy is on a slippery slope. I don't think the puppeteers can hold it together until the election.

LarryinAugusta
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Feds take over Fannie, Freddie

[quote="rklindell"]Both companies were created by an act of Congress and they opperate with the presumed backing of the US Government. They really aren't private businesses.[/quote]

Exactly. Only I would say that presumed should be removed from your comment above. People need to realize that the government caused this problem and we should not give them a pat on the back as they try to keep the faulty system from imploding. As long as they continue to absorber questionable loans then this will continue to be a problem. Maybe it is time that we take the hit and allow a shrinking of the money supply and cheap credit. This is sort of like pulling a band aid and I prefer the quick pull instead of the slow tortuous one. Let us fix the problem and not our children.

Economike
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Feds take over Fannie, Freddie

A few thoughts.

1. Fannie and Freddie are (were) financial intermediaries. Their disappearance doesn't extinguish the private credit available for mortgages. The mortgage market will be more rational without them.

2. "Bailout" is misleading. The real hazard to the taxpayers has always been the unfunded liability of the bonds issued by these two GSEs. Federal conservatorship merely moves these debts onto the books.

3. It's better to euthanize Fannie and Freddie now than to allow them to continue to skew the mortgage market and, consequently, the housing market. The decision to take over Fannie and Freddie makes the best of a bad situation.

Roger Ek
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Feds take over Fannie, Freddie

New Zealand did it. They realized they can't just print money and had to live within their means. Their economy is a tiny model compared to ours, but models are tiny and often serve to prove a design before building the real thing. New Zealand solved their problem. Government now provides adequately for those in true need. The rest need to provide for themselves. Government also needs to get out of the way to allow individuals and business to prosper.

LarryinAugusta
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Feds take over Fannie, Freddie

[quote="Economike"]A few thoughts.

1. Fannie and Freddie are (were) financial intermediaries. Their disappearance doesn't extinguish the private credit available for mortgages. The mortgage market will be more rational without them.
.[/quote]

Do you think that by moving them from quasi private companies to a government agency (I not sure exactly what they will be when this is over) will make them run more rationally? Loose credit is not always a good thing. If we let the whole thing fall through we would have started the recovery the next day and more importantly we might have learned some hard lessons.

Economike, whats you option of the Bearsterns bailout and has your opinion change in the last few months?

Economike
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Feds take over Fannie, Freddie

[quote]Do you think that by moving them from quasi private companies to a government agency (I not sure exactly what they will be when this is over) will make them run more rationally?[/quote]

Larry -

I assume the goal of taking these GSEs into conservatorship is to put them out of business. That would be more rational, since it will revive the private mortgage market.

I thought - and still think - the Bear Sterns bailout sent a message that the government would assume moral hazards for entities "too big to fail." The decision to euthanize Fannie and Freddie serves to counter that message.

LarryinAugusta
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Feds take over Fannie, Freddie

I would be happy with them disappearing and being replaced by private businesses but find it hard to believe the the government will let that happen. Who are the banks going to sell their questionable loans to if they disappear? Don't they own or are on the hook for half of the loans out there today.

Economike
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Feds take over Fannie, Freddie

[quote]Who are the banks going to sell their loans to if they disappear?[/quote]

Larry -

Fannie and Freddie were intermediaries, not sources of credit. The credit markets will function more rationally with private intermediaries. The expanded role of GSEs in the mortgage market is a fairly recent phenomenon.

LarryinAugusta
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Feds take over Fannie, Freddie

? Didn't they buy or secure loans that banks issued? By doing this they allowed the banks to issue more credit and assume less risk. Am I missing something here? (and this is a serious question as I want to understand this) I always think that that the free market will do a better so I agree with you 100% in your thinking that private intermediaries will be more rational. I'm just not convinced that our government will allow the market to take care of itself as it may not allow for the type of growth our current government wants to see.

"Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. "
http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation

Michelle Anderson
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Feds take over Fannie, Freddie

Again I give the life-saving shopping list to readers: coffee can, shovel.

Economike
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Feds take over Fannie, Freddie

[quote]By doing this they allowed the banks to issue more credit and assume less risk.[/quote]

Larry -

You get it. Fannie and Freddie were able to dominate the mortgage market because the implied guarantee from the government encouraged them to issue - and creditors to buy - their bonds without prudent concern for the value of the underlying housing assets.

This left us with a housing market whose value is difficult to assess, overrated to an unknown extent - hence a credit crunch.

I interpret the Treasury's decision to takeover the GSEs as an agreeable decision: to shrink the government's role in the mortgage market.

Roger Ek
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Feds take over Fannie, Freddie

Silver State Bank failed in Nevada on Friday. In order for the government to have a lesser role in banking they would have to eliminate the FDIC. That is too big a step right now. Bank reserves are lower today than at any time since 1950. Banks can't loan money and a huge number of transactions fail to close on time because the bank has no money to lend. This government backed cheap money system cannot be sustained long term. The solution is to let the interest rate float and competition to return to banking. Yes; Interest rates will rise. Yes; You will have to save up and put 20% down to get a mortgage. That is a normal market. That is the market my parents were in when they bought a home in 1950.

Economike
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Feds take over Fannie, Freddie

[quote]That is the market my parents were in when they bought a home in 1950.[/quote]

Roger -

Were interest rates allowed to float in 1950?

LarryinAugusta
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Feds take over Fannie, Freddie

Didn't we also have silver coins?

Roger Ek
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Feds take over Fannie, Freddie

I don't know about floating rates, but I know they needed a hefty down payment in order to get a loan.

Roger Ek
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Feds take over Fannie, Freddie

We had silver coins and we had very low inflation.

LarryinAugusta
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Feds take over Fannie, Freddie

Hard money and low inflation tend to go hand in hand.

LarryinAugusta
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Feds take over Fannie, Freddie

"At the same time, dividends on both common and preferred shares will be eliminated in an effort to conserve about $2 billion annually. All of the firms' lobbying and political activities will be halted immediately and charitable activities reviewed."

"Freddie CEO Richard Syron and Fannie CEO Daniel Mudd will no longer run the agencies, while the FHFA will assume control of the boards of both companies. Regulators took care not to foist blame on the two men, adding that they would remain with the firms to help with the transition."

http://money.cnn.com/2008/09/07/news/companies/fannie_freddie/index.htm?...

Do they even need to state the obvious that dividends would be eliminated and maybe lobbying is how we got here. NOT TO FOIST BLAIM??? You have got be be kidding me. These guys need to be fired and maybe even thrown in jail.

Michelle Anderson
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Feds take over Fannie, Freddie

[quote="Roger Ek"]These companies were allowed to create money out of nothing with no collateral to back it up. [/quote]

I had to read that sentence twice, because I thought you were talking about the Federal Reserve!

LarryinAugusta
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Feds take over Fannie, Freddie

Why is it fair that the government can pick and choose which companies to prop up. There is a risk when you invest in bonds why should I have to pay to prop up other peoples investments. You put money into stocks and bond sometimes you lose. I'm just tired of this, let it fall and we can start the recovery. They may be helping the investors that are ready to retire but they are hurting everyone else especially the ones on a fixed income.

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