U.S. Treasury looks at putting $15 billion into Fannie Mae and Freddie Mac

Since Fannie and Freddie are not supposed to be in the sub prime mortgage business to any degree - why are they in trouble? The only exposure that they should have in this area is through HUD, and that is a small part of the porfolio. I keep asking this question, but I don't see any answers yet.
I guess we will have to wait for the free press to investigate.

Lets not forget the most important piece of info in the entire financial world right. People who purchased a mortage could have taken a second mortgage to cover 20% of the total mortgage and the 1st mortgage covered 80%. This was called a piggy back mortgage. The purpose was to avoid paying any of the insurance like PMI. The first lender only loaned 80% so it wasn't required to have insurance. This was alvailable in only certain states and I have to be honest when I say I don't know how many states or how many mortgages actually have no insurance at all on them. I suspect though that some large banks and investors are going to be left holding the bag. When I say bag I mean a bag large enough to hold all the groceries in every grocery store in the entire world. I have not ssen one article the mentions this 1st and 2nd mortgage game or how they fell it will pan out! It is one thing for a company to hold a bad loan when they have back up insurance. It is entirely different when they are left holding the bag entirely by themselves!

Mr. Lindblad:

Fannie and Freddie are in trouble for two reasons. First, I trust you understand the way they do business. When the average American buys a home he gets a better rate if he meets the qualifications for a Fannie or Freddie guaranteed loan. Fannie and Freddie get paid for the guarantee and take a certain risk if the mortgage backed loan goes sour. They also get a piece for acting as a clearing house for these "guaranteed loand and buy some of them for their own portfol;io making money on the portfolio of mortgage loans.

The two culprits here are "mark to market" and leverage. Mark to market is an accounting concept introduced in the 80's. Prior to that, banks and Fannie & Freddie would hold mortgages on their books valued at face value minus or plus a discount for the difference between market interest rates and the mortgage loan rate. After the concept was introduced, these assets were valued at what they could be sold for, and that brings us to leverage.

In the recent past banks and Freddie and Fannie stopped holding mortgages and instead began to hold CDO's that is collaterized debt obligations. These are actually massive blocks of mortgages.

Now a big market developed in these CDO's as the rich tried to get richer quicker. They would invest a few dollars in a hedge fund. The hedge fund would use that money as a down payment on a CDO. Using the concept of leverage, the hedge fund "owned' for example a 10 Billion CDO for an investment of 1 Billion. If the CDO returned even a few cents on the dollar. The leverage multiplied that return ten fold.

But after a few years of salting CDO"s with worthless mortgages, the people funding the hedge funds got nervous and made capital calls (sound like 1929 yet), and the hedge funds had to dump their CDO's. Since no one is quite sure how tainted the individual mortgages in the CDO's ar, no one is willing to buy them at face value. They sell for pennies on the dollar and many hedge funds get wiped out.

Back to Fannie and Freddie. They are holding CDO's. The "market" - (which really does not exist because just like 1988, no buyers exist) - has determined the value of these holdings has declined precipitously. The decline in the value of these assets, based on their mark to market value, means Fannie and Freddie may be insolvent. It is all up to what someone is willing to pay for these CDO's. Like 1929, everyone is selling. Only Potter is buying, and only at a small fraction of true value.

SOLUTION

The answer is quite simple. Washington is getting closer but they do not seem to have figured it out quite yet. Instead of handing $180 Billion out to consumers, Washington needs to hand $180 Billion to Freddie and Fannie WITH INSTRUCTIONS. A preferred stock or even common stock purchase would get the money to the right place, a la, the Chrysler bail out, which is one of the few times the Federal government has ever made money. (The IRS takeover of the Bunny Ranch in Nevada being the other).

The dilution would not be a problem because the instructions on the use of the money will make Fannie and Freddie hundreds of billions.

The key instructions are - (A) use half the $180 Billion to buy up CDO's at a discount. This will solve two parts of the housing crisis. First, it will help Wall Street liquidate and illiquid investment, Second, it will solve the part of the housing crisis where homeowners cannot negotiate changes to their loans because the owner of the mortgage is some strange investment vehicle with no one able to make decisions. (B) F&F must use the other half of the money to replace the soured loans in those acquired CDO' with 4.5% 30 year fixed rate mortgages. The 4.5% rate will save a lot of the existing homeowners who are losing their homes only because the payments are skyrocketing on their adjustable rate mortgages. Fannie and Freddie can afford the 4.5% return because they didn't buy this money in the market at 4 to 6%, they got it from the Fed as capital. and while 4.5% may be below normal, it is still a positive return on investment. As these soured mortgages are "bought out" of the existing CDO"s the existing CDO's will go up in value and in a year or two, these Fannie/Freddie "washed" CDO's will be resold for a sizable profit.

Oh well, I guess all those Ph D's tend to make people want to complicate things.

Please feel free to comment on my solution.

Is this what Republicans always talk about less Government interference? They always claim less control, less supervision, free market, ... and then something like this happens. Who benefits more? Wealthy people. Now the Government is thinking in trowing money to rescue these 2 banks. Tax payer money. Talking about Tax-cuts. There is no tax cuts if they use peoples money to save rich people for their own created problems. In a few years people will see that the tax-cuts was only a fantasy, when their money can't buy the same things as before.
Remember that Bush was trying to link pension money with investments, so old people could get even more money by 'risking a little bit'? It looks like Republicans wanted more money to extend the 'good appearance'.

It is amazing that in a democracy, that was formed to seperate goverment from the individual private affairs, so many cry to have government save them from themselves.

Home mortgages are backed by the government as a result of the FDR new deal bail-outs and several later scandal involving bank, real estate and over appraisals. The fed saved us from ourselves.

Now home mortgage backing (Fannie and Freddie), after years of bureaucratical non-sense policies (quasi-government) and gross mismanagement is failing.

Why - our government love to diversify, segregate and categorize - it is about control. Mortgages are market driven - about profit. Anytime we allow governement to control, that which is motive driven, we will achieve the same result.

Solution - let the government fix it - NOT!!!!!!!!!!!!!!!

If private investors who hold Fannie and Freddie stock are simply told, "YOU LOSE" so that Freddie, Fannie, Indy Mack, and the Fed make money on this deal, it will blow up in Paulson and Bernanke's face. Not only that, much of the Fannie and Freddie stock and bonds are supposedly held outside the US.
It's fine for the Bush administration to try to calm the nerves of American investors tonight with a statement from Treasury--for the second time--and I hope successfully this time, but what about British, European, and Asian investors who invested heavily at every level of the US mortgage business? Their markets open soon. Are they tuned into a Paulson speech?
What about Japanese investors holding our Treasuries? They have to be very nervous about any direct infusion of funds by the Fed and the effect on our inflation rate and interest rate on Treasuries.
I simply don't believe bankers when they tell me and others, Freddie and Fannie are "adequately capitalized". These are the same people who have been telling us all along there were no more shoes to drop, the end of the tunnel is in sight, and "what credit crisis"?? They keep reporting all is well, but suddenly, surprise!!!!!!
If bankers don't go along with Treasury's scheme to buy Fannie and Freddie debt, then it is time to seize all US banks and their assets. Bankers will have lost any remaining shred of credibility.

Putting in a floor with the creation of a Federal Bank operated by the Federal Reserve may be the only way to restore public confidence.
Add to this the fact that poor Ben and Hank are working for a lame duck president with the lowest popularity rating in history, is seen as a paper tiger, and has extreme difficulty generating any degree of popular support. That is a terrible foundation from which Sec. Paulson and Director Bernanke must operate in building world-wide confidence and support. These guys are truly earning their salaries tonight and tomorrow, and I wish them well.

What is nice in this area is that there is some intelligence.
Dear Bryonyosteq: (I hope I spelled it correctly)
Thank you for the lengthy explanation, but I have a little handle on Mr. Gresham and I know who Jay Gould was also.
I realize that Fannie and Freddie are basically mortgage insurance underwriters in the affect that they guarantee the bank's initial loan. They also fall under some obscure agency something like the Office of Housing Enterprise and Oversight. THEY ARE NOT SUPPOSED TO BE INTO SHAKY MORTGAGE DEALS, EXCEPT IN THE CASE OF THOSE ISSUED THRU HUD. Now, in the case of SIV's, CDO's or whatever fancy name you happen to put on a pig - it is still a pig. This is my point. The Leadership, both private and the government oversight damn well knew what they were getting into. Everyone was plain old greedy and I am willing to bet that if a comprehensive honest investigation is conducted that we will find corruption. Plain and simple, this situation SHOULD NOT BE. Now if you don't mind, I would like to move back to 1988 - make that the time of the aftermath 1990. You are referring to the RTC. Since I have first hand knowledge of that operation I can tell you that it was corrupt and self serving. The only ones that benefited were those that were in charge.
As far as Fannie and Freddie go I know that we, the taxpayer, will have to bail them out. We cannot have them default as they also hold too many prime notes. This fiasco was caused mainly by greed and small group of people. Take note of Sen Schumer's remark on IndyMac as he is getting heat for it's collapse. I mentioned this at least 7 months ago, but I did not know exactly who. I say Wells Fargo is in deep doo-doo too. Let's see, they report this week. I can say anything, I don't count. The list of commercials and thrifts that are on the verge is large. Someone else already looked at Sun-Trust and shuddered. The big boys are already playing a debt swap operation that looks like a cross between a shell game and a ponzi scheme. Blackstone has a large piece of this action and they are tied to Merrill. Hey, and you are correct on the foreign front - they are here big time too. If you want some real fun - the Japanese are known and China has some of the action too. Everyone thinks it's the government, but they are wrong, it's the Chinese retirement funds - they have a different system.
If anyone is looking for the panacea that will repair the damage - keep looking as it just is not there.
If anything the government should be looking at means to achieve recovery, albeit, this is going to take some time. Coming up with a solid, but not stifling mortgage policy would be a step in the right direction. A graduated 5-20% up front and some checking on ability to repay. Perhaps a 1/4 point discount to those that could front 20 or better? A tight policy would not be beneficial, it has to be flexible and applied to what is intended to be a residence and not purchased for speculation. Second homes and spec. properties would have to be handled differently and at higher rates. Something like this will happen, but hindsight is always 100%.

Let Fannie and Freddie fail, they deserve it. Incompetence rules the walnut-sized brains of the mortgage giants. Wind them down before US Taxpayers get stuck with their trillion dollar debt.
If it were not for Twiddle Dee and Twiddle Dum buying HALF of all the mortgage junk out there and then securitizing them for the gullible to buy there would be no mortgage/financial crisis.
Hank Paulson and Ben Bernanke need to get a clue: Getting saddled with Fannie Mae and Freddie Mac is beating a pair of dead horses.