The Freddie-Fannie Situation Is Moving Much Faster than I Had Thought It Would...
Stephen Labaton and Steven Weisman:
U.S. Weighs Takeover of Two Mortgage Giants - NYTimes.com: [S]enior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday. The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis.... Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.
The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt. The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.
The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.... Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them....
The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market.... Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds....
In the last week alone, Freddie has lost 45 percent of its [equity] value, and Fannie is off 30 percent. Expectations of default at the companies have also risen.... Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares, which would dilute their value for current shareholders.... Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now...
Fair-value matters for private companies because things can happen that might force them to sell their assets now for whatever price they can get. That is not the case for Freddie and Fannie--with their government guarantee. For them the appropriate test is a cash-flow test: are payments coming in in excess of debt amortization payments going out? The answer is yes--so far...
