Fannie Mae and Freddie Mac

NPR.org said: U.S. Takes Over Troubled Mortgage Giants The U.S. government has taken control of mortgage giants Fannie Mae and Freddie Mac, and their top executives have been removed, Treasury Secretary Henry Paulson said. The intervention comes after the companies lost billions in the housing market turmoil, with no sign that things are getting better. In a news conference Sunday, Paulson said that the two companies will be put into conservatorship, similar to a condition of Chapter 11 bankruptcy. The Federal Housing Finance Agency, which regulates the two companies, will manage Fannie Mae and Freddie Mac on a temporary basis. "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said. Fannie Mae and Freddie Mac were created by Congress in an effort to free up money for the mortgage market. While they were eventually privatized, the two have always operated to some extent with the implied guarantee of the federal government backing them up. Together, they are tied to roughly half of the nation's $12 trillion mortgage market. Stockholders in the two companies have already seen the value of their shares fall by more than 80 percent this year. The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans." With reporting by NPR's Jack Speer and The Associated Press.

So the government is taking over these failing mostly-independent lending companies. This will cost us a significant chunk of change, but will very likely save us from a more significant economic downturn.

What do you all think?

Edit: Original article: http://www.npr.org/templates/story/story.php?storyId=94369826&ft=1&f=1003

The topic has my attention but I admit I do not fully understand the impact for today and the future.

I know one thing, the dollars are not adding up. We are bailing out home owners and propping up lending institutions. At the same time we are in a ultra expensive war. Meanwhile, the future President candidates make no mention of the debit, rather, the opposite with lower taxes.

I call BS.

I went away to the beach for a bachelor party. When I left, I still had a little faith in capitalism. I returned to find the Bushies had gone so far right that they came right around to being socialists.

Makes my head asplode.

While I understand the reasons for privatizing the mortgage giants, it really blows my mind that we've basically conceded that capitalism is a failure.

The problem with both Mae and Mac: since the gov't was involved they had a big hand in the way things were run. The gov't decided to make sthings simpler for marginal homebuyers to get into houses and directed both Mae and Mac to ease many of the restrictions, leading to the current unpleasantness.

For a sample of the programs offered, see http://www.homeloanlearningcenter.com/ConsumerHelpDesk/SpecialPrograms.htm Check out the Zero Down program, for instance. That's just TOO easy to get into and in the case of a drop in home equity the buyer is SCREWED.

Beleve me when I say the LAST thing you want is the gov't involved in ANYTHING you do.

Alternately, one could argue that the big mistake was when the gov privatized it and gave up their control and oversight.

One thing that I want to know, and is a bit hard to Google:

Where did all the money go?

What I mean by that, is they are saying it will take billions to fix the situation, but were has the money gone? Who has it?

In many situation you learn a lot by following the money trail. I know many have lost lots of "potential" money when the value of houses dropped, but that money was never really there. I am sure many of these banks are incurring costs for having to hold and sell the foreclosed homes, but that cannot be THAT much.

Is it because the banks paid for these homes at the inflated prices and those prices have dropped? In which case the "holders" of the money would be those that sold them the houses, is that where it went?

Tim Baxter wrote: Alternately, one could argue that the big mistake was when the gov privatized it and gave up their control and oversight.

By directing both companies to make loans to lower-income people? How much oversight and control is going to help those people make payments they can't afford?

Regardless of the politics of the situation, I frankly find it appalling that a news story can mention Fannie Mae and Freddie Mac so many times with ever actually saying what they are.

Duke wrote: Regardless of the politics of the situation, I frankly find it appalling that a news story can mention Fannie Mae and Freddie Mac so many times with ever actually saying what they are.

This is an ongoing issue that NPR, like many news sources, has been reporting on. They explain what these groups are in earlier articles, and probably presumed that listeners/readers were already aware of who they are.

I've read the parts of the plan they've released to the public. Sufficed to say, I have no idea what's going on.

I wish I had time for more, but here are a few 'inside baseball' thoughts. FNMA and FHLMC (Fannie and Freddie) play a dominant role in the secondary market for residential mortage loans - they not only buy loans but they set the underwriting standards for what is a sell-able.

For the past ten years or so, that underwriting decision has been automated - you put the loan parameters into a computer and you get pass/fail, based upon product, borrower and perceived risk.

Fannie and Freddie make their money two ways - by bundling individual loans into securities sold on Wall Street (and taking a cut) or by holding the loans and getting the spread between the note rate and their cost of funds.

Remember, they control the computer - and the drive for profit caused them to keep cranking up the volume by making it approve riskier and riskier loans. The easy availability of money drove home values higher an an unsustainable pace. Much of the current 'crisis' stems from them recently trying to retreat and get the riskier loans out of the market.

All of that said, if FNMA and FHLMC go BELLY-UP then the economy basically crashes. All you have left are balance sheet lenders and you will need 20% down and near perfect credit to buy a home. Home values tank. Wealth evaporates for everyday people. Economic doomsday.

Short term, the takeover is good news. Best case is that they return stability to the market, rates should go down about half a point, some buyers will be able to buy homes they couldn't otherwise and affordability will stop the decline in home prices.

It won't help the folks who currently have mortgages they can't afford and/or are delinquent.

Basically the feds had no choice on this one. They tried to stabilize the market by saying a month ago that they would lend F&F as much money as they needed. Investors were not impressed.

Longer term - we'll see.

aircooled wrote: One thing that I want to know, and is a bit hard to Google: Where did all the money go? What I mean by that, is they are saying it will take billions to fix the situation, but were has the money gone? Who has it? In many situation you learn a lot by following the money trail. I know many have lost lots of "potential" money when the value of houses dropped, but that money was never really there. I am sure many of these banks are incurring costs for having to hold and sell the foreclosed homes, but that cannot be THAT much. Is it because the banks paid for these homes at the inflated prices and those prices have dropped? In which case the "holders" of the money would be those that sold them the houses, is that where it went?

The problem is not where the money went at all. They gave loans to people that could hardly afford them. With interest rates going up, their payments went up, and they can no longer afford to make them. Along with that, values declined, and now they cannot afford to sell them either. (throw into all of that the rise in insurance as well, especially for those living in coastal regions and the fire pit that is CA, and it's killing many of these people) Freddie and Fanny do not have enough cash reserves to to compensate for the extreme amount of foreclosures, so the govt. is stepping in to bail them out.

The alternative to do nothing would probably wreck the economy beyond all recognition given the sheer number of home being talked about, assuming it is true. It would be worse than the gas price issue and more or less affect everyone of us.

aircooled wrote: Is it because the banks paid for these homes at the inflated prices and those prices have dropped? In which case the "holders" of the money would be those that sold them the houses, is that where it went?

Pretty much.

I owned a home outright and sold it for $500,000. Then made an even trade into another $500,000 house. Then, the value of both homes dropped to $250,000. I "lost" $250,000 in the deal (in paper terms only - in reality, I still own a house of equal value as my original). The buyer of my first home panics and runs away, leaving them back where they started (no home, no cash). The bank that made the loan to the buyer is really out $250,000 (they had to loan the full $500,000 and can only sell it for $250,000) + expenses.

In a functioning market, the bank wouldn't have made the loan because it was too risky. But, the banks were greedy and made bad loans. As long as the market kept going up, they won - lots of interest payments and lots of people re-financing or moving to bigger homes. But, in a down market, they lose even worse than the upside.

And, of course, being the USSA, the government is just going to privatize the whole mess and stick us with the bill.

Tim Baxter wrote: Alternately, one could argue that the big mistake was when the gov privatized it and gave up their control and oversight.

Even my local scandal rag noted, at the end of the news story, that Mac and Mae could not have both a shareholder return and at the same time provide these government mandated low and moderate income mortgages.

Any time an entity, public or private, accepts government money (including federal loan guarantees), there are strings attached. I have handled many government grants, I know whereof I speak.

Even though Mac and Mae are 'private' companies they had to accept the federal guidelines re: low income, minority, whatever group acceptance. To not do so would mean the end of the federal backing. Of course, at that time they would have been free to tighten their underwriting guidelines tremendously.

bludroptop wrote: All you have left are balance sheet lenders and you will need 20% down and near perfect credit to buy a home. Home values tank. Wealth evaporates for everyday people.

And that's a bad thing? God forbid home-buyers be expected to have some cash in hand and have proven a reasonable level of financial responsibility. Wealth evaporates? We (collective) shouldn't be using our homes as ATM machines to buy a new Lexus or install a swimming pool.

I bought a house within my means, plan to live in it for 10+ years, and now I'm expected to bail out the E36 M3head next door who bought the same house on half the salary? And bail out the desk jockey who made the loan to the E36 M3head? Berkeley. Even in socialist Scotland, loans are harder to get and repaid over a shorter period of time.

I agree, a return to some form of reasonable buying would be a good thing (ignoring the whole "death of the economy" side effect). The main reason the house prices skyrocketed was because of the easy lending. Even at current prices, most homes are still unreasonable priced for what people (the market) can afford.

Thanks for the confirmation of where the money went. So a lot of this "money" is in the hands of those "great" people who have been out there flipping houses. I always thought this was a really bad thing (they aren't adding any value to the situation at all) and is a prime example of something the government should have tried to control (like they had any control anyway).

You might say, "hell, those flippers are just responding to the market demands". Well, not actually. Money was made more accessible so that houses would be affordable to more people (at least this is what I have heard) the unintended consequence (as with almost all government "helping") of course was that many people figured out how to squeeze the money out of this situation. The sad part of about all the flipping was that the primary effect of what they were doing (besides making "free" money) was making buying home more and more difficult for the first time buyer!

biggest problem with the whole deal is..now we gotta pay for others poor choices..

2nd biggest problem.. Is the guy who is blamed with orchestrating most of the subprime melt down.. is now McCains top econ advisor..

Thank you Phil Gramm and stupid americans...

I'd say something like.. I bought well within my means, but as chris rock would say.. "You're supposed to, what you want a cookie"

http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html

http://www.dallasnews.com/sharedcontent/dws/news/politics/national/stories/071108dnpolgramm.424e457.html

http://en.wikipedia.org/wiki/Phil_Gramm

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQgyvcWXm2pM&refer=home <--- think he really stepped down? Nope.

So to recap, Fannie and Freddie were created by the Government and they have been the big players in buying these bad mortgages from banks so the banks could then free up the capital to make more bad loans. It doesn't take a rocket scientist to see that this is not a good long term business plan unless the goal is to get everyone to own a home no matter their ability to actually pay for it.

So these 2 jokes of companies lose billions while paying their CEO's tens of millions a year in salary and now we are going to foot the bill. Apparently from reading some news stories about it, we are supposed to be overjoyed at this development.

aircooled wrote: Thanks for the confirmation of where the money went. So a lot of this "money" is in the hands of those "great" people who have been out there flipping houses. I always thought this was a really bad thing (they aren't adding any value to the situation at all) and is a prime example of something the government should have tried to control (like they had any control anyway).

The "flippers" aren't really a problem - they may have contributed to raising prices, but most of them were successful in their flips, so they weren't defaulting or creating E36 M3ty loans. They made lots of money, but that's capitalism, and I don't begrudge them that profit.

The real problem was the shady mortgage brokers and banks. They wrote bad loans, sold them to Freddie and Fannie, and walked away with lots of cash in hand. They had no risk, because Freddie and Fannie would buy the loans. Freddie and Fannie would buy the loans because the government demanded that they do so. If they had been truly private companies, this might not have happened.

Of course, the banks weren't real smart, because they got really greedy and decided to invest in Freddie and Fannie, even after selling them bundles of really bad mortgages. So, many of them are now at risk of collapsing as much of their capital was tied to Freddie and Fannie stock, which is now nearly worthless.

CrackMonkey wrote: The real problem was the shady mortgage brokers and banks. They wrote bad loans, sold them to Freddie and Fannie, and walked away with lots of cash in hand....

That makes more sense with the amounts they are talking about. But still when they are talking about $400,000,000 (!!!!!!!) to bail them out, I am just curious who this money is going to (or who it went to). I mean that's "buy a country" kind of money. It seems like even with it spread out there would be a bunch of people with huge Scrooge Duck piles of money to play in.

$4 hundred million is only 1 thousand $400,000 homes. Did you mean $4 hundred billion?

Either way, money will go to Freddie and Fannie to cover their loses due to foreclosures. More money will go to investment banks to cover their losses from heavily investing in mortgage based securities. Can't let the investment banks fail because that would shut Wall St down in a way we don't want to see. And even more money will go to commercial banks to cover their losses due to holding large portions of their capital in Freddie and Fannie stock.

Commercial banks are required to hold a certain ratio of "cash" to deposits. Cash is quoted, because they could use low-risk investments in lieu of actual cash. Prior to the housing shenanigans, Freddie and Fannie were considered low enough risk to count towards their capital requirements. That is no longer the case, as Freddie and Fannie are now penny stocks. I the banks can't get cash from investors, they'll likely be forced into insolvency, which would cause a rush on deposits and put FDIC into overtime.

TJ wrote: So to recap, Fannie and Freddie were created by the Government and they have been the big players in buying these bad mortgages from banks so the banks could then free up the capital to make more bad loans. It doesn't take a rocket scientist to see that this is not a good long term business plan unless the goal is to get everyone to own a home no matter their ability to actually pay for it. So these 2 jokes of companies lose billions while paying their CEO's tens of millions a year in salary and now we are going to foot the bill. Apparently from reading some news stories about it, we are supposed to be overjoyed at this development.

You are so off base as to not even be funny. Keep in mind this is a quasi-governmental agency and it doesn't play by the same rules as does free enterprise. They are TOLD how they will do business. And they are definitely not "jokes of a company" as without them you and tens of millions of others would not be homeowners.

I sold real estate prior to FNMA and FHLMC and as a Realtor we expected to have each purchaser go thru 2-3 mortgage companies or banks before they could get approved for a loan AND FUNDED. We were all the time getting people approved for loans but then the bank couldn't fund because they'd run out of money. Depending upon the time of the year and the economy we sometimes couldn't get people funded for months.

Fannie literally changed to face of real estate.

We began to use mortgage companies instead of banks because, although they had more paperwork and it took longer to get the loan processed (they used prudent underwriting practices instead of "good ol boy approvals like the banks) we could count on them having money to actually fund the loans.

Here's the present day problem and it goes back to that governmental oversight. Back in the Clinton era a certain SIG (special interest group) who voted predominately Democratic, lobbied to get the loan underwriting guidelines liberalized because they claimed that the members of their group was being discriminated upon because they didn't have the same credit ratings as other people. They said it wasn't right to ask that group to change their credit patterns as that was part of their culture so we should change underwriting guidelines to make this group better represented in the home ownership market.

It didn't matter that the reason this group was "underserved" in the mortgage market was their pay histories and lack of savings abilities.

Lobby/$$$/Politicians - what do you think happened? It really didn't matter that the chance this group would pay back the loans in a timely fashion and foreclosure rates would rise because that would be on someone else's watch. And if they should be so lucky as to still be in office these same politicians would have a chance to be a hero again when they helped "fix" the problem. This is all part of the "PC" problem. We have to appear to be liberal and politically correct in all things we say and do. Common sense doesn't apply to American anymore.

Well the first round of liberalization of credit standards didn't seem to be adding enough of this group so they added lots of next to nothing down or Zero down loans. BUT, and this is the problem of opening Pandora's Box, the Pols couldn't make these loan types available to just one group of people. Ironically that wouldn't be PC so they had to open it up to everyone. Once again the face of real estate was changed, but this time by politicians.

Those of us in the mortgage industry have fought these new rules and warned of the problems since they were first proposed but we weren't listened to.

Then came the advent of computerized underwriting. Contrary to popular belief the computer doesn't actually underwrite the loan, people still do that. But the computer makes a recommendation that if everything actually checks out as the data was entered, then the underwriter should look favorably upon the applicant and to give it some weight, if you do what the computer says then we'll give the lender indemnity for the loan. Which only means that if the lender uses their own guidelines and the loan isn't good the lender eats it but if they do follow the guidelines and the loan isn't good the lender is made whole on the loan. So what would you do if you had been a lender? Follow your conscience or the money? One way puts you out of business.

Election years are always interesting. The party out of power has to stir things up to make the party in power look bad. The Fannie/Freddie hub bub was mostly political in nature but then so was the "fix". Most of these foreclosures were happening in about 7 states. These were either states that baseless runaway inflation or states that had manufacturing bases that had left. Many states had lower than normal foreclosure rates. Overall the foreclosure rate is only up about 1/2% over norms. They expect 2+% in a normal year.

Now if you want to see a little more governmental sleight of hand go look at actual foreclosure numbers and percentages of FNMA/FHLMC vs FHA. FHA numbers are 3 times higher than Fannie and Freddie due totally to "governmental approval guidelines". They have been using FHA as a B lender for years now and they don't allow them to use prudent underwriting guidelines. Well, I have to go work for a while.

carguy, thank you. That's exactly the point I've been trying to make. Forcing Mae and Mac to make loans easier to get meant a much larger portfolio of 'iffy' loans and now those chickens have come home to roost.

carguy123 wrote:

TJ wrote: So to recap, Fannie and Freddie were created by the Government and they have been the big players in buying these bad mortgages from banks so the banks could then free up the capital to make more bad loans. It doesn't take a rocket scientist to see that this is not a good long term business plan unless the goal is to get everyone to own a home no matter their ability to actually pay for it. So these 2 jokes of companies lose billions while paying their CEO's tens of millions a year in salary and now we are going to foot the bill. Apparently from reading some news stories about it, we are supposed to be overjoyed at this development.

You are so off base as to not even be funny. Keep in mind this is a quasi-governmental agency and it doesn't play by the same rules as does free enterprise. They are TOLD how they will do business. And they are definitely not "jokes of a company" as without them you and tens of millions of others would not be homeowners. I sold real estate prior to FNMA and FHLMC and as a Realtor we expected to have each purchaser go thru 2-3 mortgage companies or banks before they could get approved for a loan AND FUNDED. We were all the time getting people approved for loans but then the bank couldn't fund because they'd run out of money. Depending upon the time of the year and the economy we sometimes couldn't get people funded for months. Fannie literally changed to face of real estate. We began to use mortgage companies instead of banks because, although they had more paperwork and it took longer to get the loan processed (they used prudent underwriting practices instead of "good ol boy approvals like the banks) we could count on them having money to actually fund the loans. Here's the present day problem and it goes back to that governmental oversight. Back in the Clinton era a certain SIG (special interest group) who voted predominately Democratic, lobbied to get the loan underwriting guidelines liberalized because they claimed that the members of their group was being discriminated upon because they didn't have the same credit ratings as other people. They said it wasn't right to ask that group to change their credit patterns as that was part of their culture so we should change underwriting guidelines to make this group better represented in the home ownership market. It didn't matter that the reason this group was "underserved" in the mortgage market was their pay histories and lack of savings abilities. Lobby/$$$/Politicians - what do you think happened? It really didn't matter that the chance this group would pay back the loans in a timely fashion and foreclosure rates would rise because that would be on someone else's watch. And if they should be so lucky as to still be in office these same politicians would have a chance to be a hero again when they helped "fix" the problem. This is all part of the "PC" problem. We have to appear to be liberal and politically correct in all things we say and do. Common sense doesn't apply to American anymore. Well the first round of liberalization of credit standards didn't seem to be adding enough of this group so they added lots of next to nothing down or Zero down loans. BUT, and this is the problem of opening Pandora's Box, the Pols couldn't make these loan types available to just one group of people. Ironically that wouldn't be PC so they had to open it up to everyone. Once again the face of real estate was changed, but this time by politicians. Those of us in the mortgage industry have fought these new rules and warned of the problems since they were first proposed but we weren't listened to. Then came the advent of computerized underwriting. Contrary to popular belief the computer doesn't actually underwrite the loan, people still do that. But the computer makes a recommendation that if everything actually checks out as the data was entered, then the underwriter should look favorably upon the applicant and to give it some weight, if you do what the computer says then we'll give the lender indemnity for the loan. Which only means that if the lender uses their own guidelines and the loan isn't good the lender eats it but if they do follow the guidelines and the loan isn't good the lender is made whole on the loan. So what would you do if you had been a lender? Follow your conscience or the money? One way puts you out of business. Election years are always interesting. The party out of power has to stir things up to make the party in power look bad. The Fannie/Freddie hub bub was mostly political in nature but then so was the "fix". Most of these foreclosures were happening in about 7 states. These were either states that baseless runaway inflation or states that had manufacturing bases that had left. Many states had lower than normal foreclosure rates. Overall the foreclosure rate is only up about 1/2% over norms. They expect 2+% in a normal year. Now if you want to see a little more governmental sleight of hand go look at actual foreclosure numbers and percentages of FNMA/FHLMC vs FHA. FHA numbers are 3 times higher than Fannie and Freddie due totally to "governmental approval guidelines". They have been using FHA as a B lender for years now and they don't allow them to use prudent underwriting guidelines. Well, I have to go work for a while.

1. That's racist.
2. Why do you hate America?
3. Didn't you read the part of the constitution that said everyone is guaranteed a home? Duh!

1. I'll admit it, I and everyone I know is racist
2. I'm not so sure it's all of America I hate or just the pols.
3. I went to public schools, I can't read!

One of the downsides of this tightening. I have a customer right now that has almost 700 credit scores, just enough money in the bank to close and have the appropriate reserves, 5% down, very low debt ratios (31% when textbook says you can have 36% or more) and we are having trouble getting him approved.

I sure wish they'd just hit a happy medium and be done with it.