It wasn’t a good day yesterday for GSEs Fannie Mae and Freddie Mac. It’s apparent that they are being hammered by the "Credit Crisis Part II":
Nov. 21 (Bloomberg) — Freddie Mac, the second-largest U.S. mortgage-finance company, may need to raise as much as $6 billion to bolster its capital amid the worst housing slump in at least 16 years.
The government-chartered company yesterday said it would seek more reserves in a “large transaction,” after reporting its biggest quarterly loss. The amount may be $5.5 billion to $6 billion, according to Fox-Pitt Kelton analyst Howard Shapiro. Friedman Billings Ramsey analyst Paul Miller and Gary Gordon, an analyst at Portales Partners LLC in New York, predict $5 billion.
“It’s not going to be a small number,” said Gordon, who is advising investors to refrain from buying more of the company’s shares.
What will this mean to a mortgage market that has already tightened significantly? According to Inman News:
[Hat tip L!]
Freddie Mac’s loss, and a similar turn of events at Fannie Mae, could weaken the ability of both companies to serve as bulwarks to mortgage lenders who have become increasingly dependent on their ability to buy, guarantee and securitize loans.
Major lenders like Countrywide Financial Corp. have shifted the majority of their production into loans eligible for repurchase or guarantee by Fannie and Freddie, as Wall Street investors have become reluctant to buy securities backed by mortgage loans that lack such guarantees.
Shapiro recommended yesterday that investors sell the shares and stated:
This is a disaster for the broader mortgage capital markets. To the extent that Fannie Mae and Freddie Mac cannot grow, you are taking even more liquidity out of the markets.
The question is, how much liquidity will be taken out. Will yesterday be known as the day that the conforming mortgage market died? What kind of mortgage industry will rise from these ashes?
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This will hopefully put the nail in the coffin of the plan to raise conforming limits. In fact, I’d say that anybody suggesting it, now or in the past, should be publicly flogged for an utter lack of basic common sense.
The inevitability of this news was as obvious as the nose on your face, yet certain individuals pretended that the emperor’s clothes looked magnificent. I hope both Schumer and Bernanke face a day of reckoning over this one (yeah right, not with our clueless media out there who still talk of a “subprime” issue).
Wow. Time to stick a fork in it, this house of mine is done for, at least as far as selling it.
Feels like a casino when it’s too late to change your bet. At this point not many folks will be able to get in or out of a house anymore. Now helicopter Ben will spin the wheel of misfortune, and we’ll see if the renters or owners suffer more under inflation.
TC-
It’s an interesting situation, isn’t it? Banks holding all these REOs and no way to sell them if they can’t finance them. Then credit standards are tightening as the pool of buyers is shrinking.
It sounds like the “No Win Scenario,” doesn’t it?
Nerd alert!
It will be very interesting to observe the markets this week and next.
I’m betting that retail sales over the holiday weekend are not what many retailers are hoping, and that the R word is all over the news next week.
I come from a family that is strong on the “true meaning of Christmas” message. We’re not big holiday shoppers. We do buy gifts for each other, but they are few and meaningful.
We also try to make it a point to do something good for others, but not just at this time of the year. We are year-round volunteers and givers.
Retailers never get the sales they want it seems. This year electronics will sell big as they always do. Also, people will shop with credit no matter what. It was a pretty good year still.
What amazes me is how the feds keep dropping the interest rates but then everyone’s worried about the loan resetting and the rate going up. It’s just senseless and confusing from a simplistic point of view.
I had a situation recently with Wells Fargo where they had me paid up in interest two months ahead, by of course charging me double interest for a month. I had to call them and say no bro, you apply that to my principal right now. I tried the biweekly payment plan to see if they would compound biweekly and they won’t. Pretty sad.., they have no desire for note holders to pay off their mortgages. That’s how bad the racket has become.
toys,
“What amazes me is how the feds keep dropping the interest rates but then everyones worried about the loan resetting and the rate going up. Its just senseless and confusing from a simplistic point of view.”
#1
Not all arms are tied to the FFR. Some are tied to LIBOR, & that central bank does not do just as the US does.
#2
Even if you are tied to the FFR, it’s not that you get that rate. You get the FFR + x%. So if you’re set @ a markup of 4, then your reset rate is still high compared to that initial teaser rate of 5.5%.
(anti-spam “word” = 1929.
Nice.)
Toys -
Nothing is tied to the FF rate right now. The bonds are trading below the actual FF rate. That is called a flight to safety.
I really think this year’s X-mas/Black Friday is going to be a bust. We have had a lot of “first time ever(s)” lately and I don’t think this X-Mas/Black Friday will be any different. Have you seen any of the ads?
Most of the products out there are actually more expensive this year compared to last. There are a few good deals on Laptops… but TV’s are almost the same price. Its going to be UGLY.
I’m waiting for awhile and then I’ll call my lender and offer to pay off my mortgage for 50 cents on the dollar. I figure they will be so desperate for cash, they may just go for it.
Another interesting thing.. Given the tax deduction on my mortgage I am getting close to earning more in a FDIC insured CD than I’m paying on my mortgage….
What’s in your wallet?
http://www.papereconomy.com/BNN.aspx?id=457
OFHEO’s Lockhart discusses the Fannie & Freddie meltdown on Bubblevision:
Some key takeaways:
-”in these markets there is new operational risk emerging such as the model risk”
(read as: “just wait until they mark-to-market instead of mark-to-model”
-”there is more credit risk”
(read as: Delinquencies and foreclosures are rising)
“therefore it’s prudent to keep the (regulatory required minimum capital) for Fanny cushion there”
“critical to keep that 30 % there”
- “companies would be better now if politicians had drafted legislation to improve OFHEO oversight a couple of years ago”
(read as: “it’s not my fault if the machine falls apart)
-”we have a very good accounting group at OFHEO”
NICE!
but…
“we want to give them some flexibility”
&
-(Q: “if you get the regulations you want, would you further raise the cap”) “in some markets … we could slightly reduce their capital requirements …(and) the mortgage caps will be looked at through the legislative process”
read as: “The politicians are to blame for the current situation, so they should also take responsibility now. Don’t point at me.”
Good to know that OFHEO thinks that it didn’t have sufficient oversight since … 2004! Hey, they’ve only been flying blind for 3 years!