The New York Times reports that Federal National Mortgage (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) have a tiny sliver of capital to support a mountain of mortgages. To put it in perspective, their level of borrowing is almost twice that of the enormously over-leveraged investment banking and hedge fund industries. With the collapse of the housing market, Freddie and Fannie are in trouble. And when you get to the scale of these two, so is America.
As I posted last month, it could cost $1 trillion to bail out Fannie and Freddie. These hybrid organizations are a key cog in the mortgage industrial complex (MIC) that has gotten the world into its current capital crisis. Fannie and Freddie buy "conforming" mortgages from their originators and then package and sell the mortgages as securities. But these two have a mere $83 billion in capital to support $5 trillion worth of debt and other commitments.
This 60-to-1 ratio is almost twice the 32-to-1 ratio of the highly leverage investment banks and hedge funds. And like any company with hard-to-value assets, Fannie and Freddie have unrealized losses. In their case, those total $20 billion -- they've already taken $9 billion worth so far this year. By 2007 they had guaranteed or invested in $717 billion of subprime and Alt-A loans, up from almost none in 2000. And many of those are not worth that much.
Meanwhile, Congress just raised the size of the mortgages Fannie and Freddie can buy from $417,000 to $730,000. But if they accounted accurately for the value of their losses. they might not have enough capital to continue buying mortgages.
If the U.S. needs to spend $1 trillion to bailout these companies, will that be a high enough cost for us to realize that it's time to end securitization?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
Reader Comments (Page 1 of 1)
5-06-2008 @ 9:24AM
william lindblad said...
Good, now tell me why Congress just upped the ante and raised the loan caps? Jackson, whatever his personal faults, disagreed and told them it would be a bad move. This tells me that Congress had little idea what they were doing. Your figure is correct and the taxpayer simply cannot afford it.
5-06-2008 @ 10:10AM
JP said...
OFHEO also issue a press release this morning to reduce the minimum cap ratio for FNM (again) to 15%. Why is the prganization LOWERING the minimum capital requirement and FNM is RAISING its capital by with a fresh new $6 billion, and a dividend cut? No wonder gold jumped today.
OFHEO continues its OFHEO-directed requirement of a surplus over minimum capital, which was lowered from 30 to 20 percent in the March 19, 2008 agreement with Fannie Mae in return for their commitment to raise significant additional capital. The company announced such a capital raising initiative today. As indicated in the agreement, OFHEO intends to further lower the OFHEO-directed requirement to 15 percent upon the successful completion of the fund raising effort.
5-06-2008 @ 10:35AM
B. Harrison said...
So, in essence, Fannie and Freddy have been duplicitious in working with the other financial corporations in FLEECING the American citizens, and undermining our economy.
This amounts to nothing short of being a financial con game being perpetuated against the American people. Those responsible shold be charge with criminal fraud and should be prosecuted to the fullest extent allowable by Law.
"Corporate GREED" and their impunity for the Law, (and cnfidence hat they would never be prosecuted for crimes) is what has led up to the basis for this debacle. It's time that those responsible for this fraud are charged and prosecuted for their CRIMES! This wasn't just "some sort of oversight on the part of the corporate managmenet. They definitely knew what they were doing; that's what theyhave all of those Harvard adn Princeton MBA people for, isn't it?
5-06-2008 @ 8:33PM
Peter said...
S&P have already written an article about the threat to the long-term AAA sovereign rating of the U.S. detailing that it was most likely to come from the capital requirements of the GSEs.
I don't agree with a lot that S&P says, but they might have this one right. It would be a bloodbath if it happened.