OK, so it’s ‘007 Year of the Bond, not to mention The Year of the Pig, but do the GSEs really have superpowers? [1] What we do know is that the situation in subprime is calling for a superhero, and when a Fed Governor minimizes the problem [2] you know her minimal problem is significant. So it was timely earlier this month when Freddie Mac CEO Richard Syron showed up with a phone booth under one arm and a change of clothes under the other. His message? If Congress and the Administration let Fannie and Freddie loose, they can help stabilize mortgage finance against the problems coming out of the weak sub-sector.
I’ve got a nasty feeling that this stabilization will involve Freddie (and Fannie) buying lots and lots of the subprime paper. On Monday Doomer Jan-Martin reminded us of his own Sept 18, 2006 Immobilienblasen post featuring reports that Fannie already had a lot of the stuff. As well, Monday’s The GSE Report (Feb 5-19, 2007) summarized news reports from the recent Senate hearing that touched on F&F’s subprime purchases. Of all things, Rev. Jesse Jackson was complaining that their subprime purchases were contributing to predatory lending practices.
from The GSE Report:
After the hearing, Senate Banking Committee chairman Chris Dodd (D-CT) told reporters, “I am a strong supporter of the GSEs, [but] that does not mean that they are immune from the kind of criticism raised here.” Dodd indicated that the GSEs’ purchases of subprime securities will be an issue addressed when the Committee drafts a GSE regulatory reform bill. “We will be looking at that when we talk about the legislation,” he said. (National Journal’s CongressDaily, Bill Swindell, 02/08/07; National Mortgage News Online, 02/07/07; National Mortgage News, Brian Collins, 02/12/07)
Neither Freddie nor Fannie is publishing current financials, although both have brave plans to catch up within the next several months. It would certainly seem to be prudent to get a good up-to-date picture of both companies’ financial strength before they go hog-wild (there’s that Year of the Pig thing again) adding to their portfolios subprime MBS the private label lenders can no longer handle. Otherwise, Syron’s brave offer might just turn out to carry a risk of exposing Freddie’s balance sheet to a big dose of Kryptonite.
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Notes and References
[1]: "Fannie, Freddie pose as housing finance saviors", by Patrick Rucker, Reuters, February 20, 2007. Emphasis in the quotes mine.
While other mortgage financiers flooded the housing market with cash and eased loan terms during a five-year boom that ended in the summer of 2005, Fannie and Freddie held their standards in place, missing out on the seeming bonanza.
Now, many lenders who piled into the market with easy money are getting stung by foreclosures, while Fannie and Freddie’s fortunes may be set to take a turn.
Newcomers to housing finance like private equity firms and hedge funds "cannot be held accountable" like government-sponsored enterprises Fannie and Freddie, Freddie’s chief executive, Richard Syron, said earlier this month.
"All of which begs the question, ‘Why overly hamper us just when you’re going to need us most?’," he asked as he made a case against raising the regulatory bar facing the two companies.
…
As other investors exit the housing finance sector, Fannie and Freddie can argue they must stay large and strong to pick up the slack, said Conrad Egan, president of the National Housing Conference, a group supportive of Fannie and Freddie’s mission of providing affordable housing finance.
…
"As a marketplace phenomenon, the GSEs are in a good position to bring stability back. That’s good business and it’s good politics," said Howard Glaser, an independent mortgage analyst in Washington.
[2]: "Most of mortgage market problem-free -Fed’s Bies", Reuters, February 20, 2007.
"We have seen coming out of this very rosy period one segment of this market that is starting to behave in a very problematic way and that is the subprime adjustable rate mortgages," she said in a speech to the Duke University Fuqua School of Business.
"In the aggregate, what I’m talking about is a sliver that is 7 to 8 percent of all outstanding mortgages," she said
In the year of the pig’s, the pig’s get Slaughtered.
Today’s post may sound pretty abstract, but the issues are starting to affect real people. This morning brings us a piece from the Denver Post about a “tipping point” in foreclosures even in affluent parts of Douglas County, CO. The author noted Susan Bies’ speech, and is not very sympathetic.
“Risky loans come home to roost”, by Jim Spencer, Denver Post, February 21, 2007.
John-
The best line in the Rucker piece was this one:
I thought pretty much everyone else listed on the stock exchange was required to report (which indicates accountability to me) when F&F’s financials remain unknown.
Syron must be great at parties.
Twist -
Syron means politically accountable to Congress for that American Dream thingie. GSEs aren’t actually economic animals at all, they’re firmly attached to the government by strong cables, like anchors, so all their risks are political. That’s why F&F’s stock defied logic and rose with the Democratic Party’s fortunes through the mid-term elections. (Easy to see in retrospect!)
And like anchors, under certain desperate conditions the government can take a big axe to the cable and and cut themselves loose. That’s what that “US Treasury ain’t responsible” language on their senior bonds is for, implicit guarantee or no implicit guarantee.
John-
Political accountability should be a matter of Congress being able to “hold their feet to the fire.” Certainly the OFHEO has made improvements, but GSE’s political ties have allowed them to get away with more than would be allowed in industries with fewer government ties.
Syron seems to be implying that they are held to a higher standard. I’m not seeing it.