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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerMore than likely, it's the conversion of each to an overt, government-based organization, so says economist Peter Dawson. Earlier this year, the U.S. Treasury purchased Fannie and Freddie for $1 billion in senior preferred stock in each company and warrants representing ownership stakes of 79.9%.
Will FNM, FRE become government agencies?
But don't run to sell or buy Fannie's (NYSE: FNM) or Freddie's (NYSE: FRE) stock just yet, Dawson carefully added. There are too many variables and unknowns regarding the health of the U.S. economy to say with a 95% confidence interval what form Fannie and Freddie will take in the Obama Administration, Dawson said.
The biggest factor in Dawson's projection that Fannie and Freddie will have to be formally aligned with federal government operations? The $5.3 trillion in mortgages that the two government service enterprises own or guarantee - - or roughly 44% of the U.S. mortgage market.
"The immediate focus of Congress is the fiscal stimulus package, and that's warranted, given the recession and the large stimulus that will be needed to get GDP headed in the correct direction again," Dawson said. "But one, major, longer-term focus has to be Fannie and Freddie. They are likely to require federal cash infusions, via buying their mortgage-backed securities, or other investments, for at least a decade, probably longer."
The total cost to taxpayers? Dawson could not put a figure on it, as it will vary greatly depending on: 1) when the economy starts to recover, 2) when the housing market rebounds, 3) the availability of private sector mortgages, and 4) any new debt Fannie / Freddie might buy to increase the pool of mortgage funds available to banks.
"Fannie and Freddie may end up buying securities backed by mortgages originated by lenders at a 4.5% fixed rate to encourage home purchases," Dawson said. "It would help pull the housing sector out of its deep recession, but it will likely add to Fannie's and Freddie's operating costs."
Housing Sector / Economic Analysis: As economist Dawson noted, it's too soon to gauge the cost of Fannie's and Freddie's recovery to taxpayers, but the nation has to think in terms of a 10-year recovery plan to re-coop the taxpayers' investment in the secondary mortgage giants. Further, the Fed's recently-announced quantitative easing policy adds another variable to FNM's and FRE's status. Stay tuned.
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Reader Comments (Page 1 of 1)
12-23-2008 @ 11:30AM
rollo thomasi said...
And what happens if the Government decides to nationalize Freddie and Fannie?
They could simply buy up the existing stock now, at bargain basement prices.
2-25-2009 @ 3:49PM
heather said...
So would these two companies be a good investment right now because they are now penny stocks? will the stock price eventually rise back up to what it was when the real estate market was good, or will these companies never recover? Isn't it good that the government will not let the companies fail?
I have recently became interested in the stock market (that is why I have so many questions) and these companies caught my interest.