Fannie, Freddie to Buy $40 Billion a Month of Troubled Assets
By Dawn Kopecki
Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
That's Saturday Oct 11th. Personally I don't want my regulators working weekends. It sends the wrong message like maybe there's something wrong with the world financial system. "Contained" means M-F with Wednesday afternoons for business meetings in an informal setting (golf).
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.
Okay. Show of hands. How many of you feel the need to be buying non-perfoming mortgage securities? Twas as I suspected.
Too tough? Alright then, sophomore civics question. Careful, there's going to be a revolution at the end of the semester and this might count towards your final conviction or acquittal. Question, where in the Constitution and any of its myriad bastard children does it say the directives of Federal Regulators (FHA) are confidential?
The Federal Housing Finance Agency, which placed the two companies in conservatorship on Sept. 7, directed them last month to start increasing their purchases of loans and mortgage-backed securities as the Treasury seeks to absorb underperforming and illiquid assets from financial companies.
``For now, they're under conservatorship and they have to be used to keep the flow of capital going to the housing market,'' former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television's ``Conversations with Judy Woodruff.'' ``They're important to maintaining the flow of government finance'' and need to be used actively, he said.
Ohhhh, "government finance." Let's look at the FHA mission statement:
• Contribute to building and preserving healthy neighborhoods and communities;
• Maintain and expand homeownership, rental housing and healthcare opportunities;
• Stabilize credit markets in times of economic disruption;
• Operate with a high degree of public and fiscal accountability; and
• Recognize and value its customers, staff, constituents and partners.
Well I take it back. There it is; "Stabilize credit markets in times of economic disruption." I'm thinking the authors of the Interstate Commerce Clause could learn from these people.
Adding underperforming assets to Fannie and Freddie's combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury's relief program, their regulator said Oct. 5.
Is anyone else feeling a little "Through the Looking Glass" here? They need to load up on bad debt so they can get assistance that would otherwise go to bad debt instead?
I can only hope you all put down your beverage before reading that the spokesperson for Fannie is name Faith.
Neither Fannie nor Freddie has turned a profit in the past year, accumulating $14.9 billion in combined quarterly losses, largely related to bad subprime and Alt-A mortgage assets.
Yet more evidence of the folly of weekend regulation.
``The overall goal of the program will be to contribute greater stability and liquidity in the mortgage market, which should enhance consumers' access to mortgage financing and ultimately result in reduced mortgage interest rates,'' FHFA Director James Lockhart said in a Sept. 19 statement.
Sept 19th? They were planning on hitting the Treasury $700b two weeks before it was passed?
Subprime loans were given to borrowers with poor or limited credit records or high debt burdens. Alt-A loans were made to borrowers who wanted atypical terms such as proof-of-income waivers, without sufficient compensating attributes. About 35 percent of subprime loans in non-agency mortgage securities are at least 60 days late, while 15 percent of Alt-A loans are, according to a Sept. 9 report by FTN Financial Capital Markets.
The phrase "cascade tripwire" comes to mind.
Non-agency, or private-label, bonds are issued by banks and don't carry guarantees by Fannie, Freddie or government-agency Ginnie Mae. Freddie held about $207 billion in non-agency debt in its $760.9 billion portfolio as of August, according to its latest monthly volume summary. Fannie had about $104 billion of such securities in its $759.9 billion portfolio in August.
It isn't bad enough that we've guaranteed F&F despite the explicit disavowal of liability but now we are actively seeking new liability.
Regulators initially restricted Fannie and Freddie's growth when they seized control of the government-sponsored enterprises Sept. 7. To ``promote stability'' and lower mortgage costs to borrowers, Treasury Secretary Henry Paulson said the two would be allowed to ``modestly increase'' their mortgage portfolios to as much as $1.7 trillion through the end of next year and said they would no longer be run ``to maximize shareholder returns.''
Read above where there are no shareholders and no profit for at least two years. Apparently some goals are more equal than others.
Less than two weeks later, Fannie and Freddie were told to ramp up their mortgage bond purchases as the financial crisis deepened and credit activity came to near standstill.
Fannie and Freddie which own or guarantee almost half of the $12 trillion U.S. home loan market, were given access to $200 billion in emergency Treasury financing as part of their rescue package. The companies may also be able to sell their bad debt to the Treasury through its $700 billion financial-rescue program signed into law Oct. 3.
Shall we hold our breath?
To contact the reporter on this story: Dawn Kopecki in Washington at firstname.lastname@example.org.