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FED to rescue Fannie Mae?


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QUOTE (Livas1 @ Saturday 12/07/08 03:42pm)

Yeah, Livas. I have a vague memory of that as well. The recourse for a residential home loan (at least in California) is limited to the property. This means that for those whose property has come down in value several hundred thousand dollars and is now worth significantly less that what is owed, it may in fact make sense to simply walk away.

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FYI, came across this on my travels. Some may find this little summary useful...



Key facts on Fannie Mae and Freddie Mac

Shares in U.S. mortgage finance firms Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) plunged this week as market speculation mounted that the government was set to take them over to resolve their funding problems.

Here are some key facts about the two companies:


-- Formal name: Federal National Mortgage Association

-- Created in 1938 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing.

-- Annual revenue: $43.71 billion (Dec. 31, 2007)

-- Chairman: Stephen B. Ashley.

-- Shares touched a 52-week high of $70.57 on Aug. 22, 2007 and fell as low as $6.87 on Friday, but closed at $10.25.


-- Formal name: Federal Home Loan Mortgage Corp.

-- Created in 1970 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing

-- Annual revenue: $42.91 billion (Dec. 31, 2007)

-- Common stock outstanding: 646.27 million (Jan. 31, 2008)

-- Chairman: Richard F. Syron.

-- Shares touched a 52-week high of $67.20 on Aug. 17, 2007 and fell as low as $3.89 on Friday, but closed at $7.75.


Fannie Mae and smaller Freddie Mac are shareholder-owned companies charged by Congress with supporting housing by keeping money flowing in the mortgage market. Due to the congressional charter, the two are often referred to as government-sponsored enterprises, or GSEs.

Due largely to an implied government guarantee, they are able to raise funds relatively cheaply by selling debt to investors. The funds they raise are then used to purchase home loans from mortgage originators such as banks, allowing the lenders to make fresh home loans.

While the collapse of the subprime mortgage market, which caters to borrowers with poor credit histories, has contributed significantly to the U.S. housing slump, the vast majority of mortgages purchased by Fannie Mae and Freddie Mac are prime, fixed-rate loans on which borrowers are current.

Fannie Mae and Freddie Mac bundle the loans they purchase into securities which are sold, with a guarantee of payment, to investors worldwide. In addition, the two companies also guarantee mortgages and pay owners of the loans when there is a default.


The two companies hold some of the loans they purchase and securities they bundle in their investment portfolios. Fannie Mae said its portfolio was $736.9 billion in May, the highest since August 2005, while Freddie Mac said its portfolio was a record $770.4 billion in May.

Including investments and guarantees, Fannie Mae's total book of business topped $3 trillion for the first time in May, twice its size at the beginning of 2002.

With Freddie Mac's $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market.


As the housing market continues to deteriorate, foreclosures have spread beyond subprime loans to higher-quality mortgages. The two companies have been required to write down their loans held for investment and pay out on guaranteed mortgages that default, depleting their capital.

Fannie Mae and Freddie Mac have reported more than $11 billion in losses since the housing market bubble burst.

Contrary to many other financial institutions, Fannie Mae and Freddie Mac have never been required to hold much capital relative to their assets. That leaves them with a smaller cushion for absorbing losses.

A lack of capital also indicates they are unable to buy mortgages from lenders.


Analysts and investors expect the two companies to raise capital.

Fannie Mae raised $7.4 billion of capital in April and May by selling common and preferred shares. Freddie Mac has announced plans to raise $5.5 billion but its ability to do that by selling shares will be difficult given the sharp drop in its stock price.


The two companies' presence in the struggling housing market is widely considered to be critical. They help keep mortgage rates low for many consumers, but the companies are struggling to balance growth through buying loans against rising delinquencies.


In 1979, Fannie Mae became insolvent as the market value of its liabilities exceeded the market value of its assets. This turned around as market factors eventually worked in the company's favor. The U.S. government did not get involved.


The Office of Federal Housing Enterprise Oversight
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In reply to: Danville on Monday 14/07/08 09:04am

Hi Danville


Here is the speech from Hank. I assume Treasury buying Freddie/Fannie equity would be in the context of upcoming capital raisings.


nb - Freddie is issuing $3b in debt tonight so the market will be watching to see whether they get this away cheaply or not.






Following is the text of a statement issued today by Treasury Secretary Henry Paulson:

    Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.
    GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.
In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
    First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury.  Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
    Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.
    Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.
    I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.
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QUOTE (Livas1 @ Monday 14/07/08 09:19am)

Paulson Seeks Authority to Shore Up Fannie, Freddie (Update1)


By Brendan Murray and Dawn Kopecki


July 13 (Bloomberg) -- Treasury Secretary Henry Paulson sought authority from Congress to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of U.S. mortgage financing.


Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity ``if needed'' in the firms, and to increase their lines of credit with the department from $2.25 billion each. The Federal Reserve authorized the companies to borrow directly from the New York Fed, in a step that could provide funding before the bill is passed.


Today's announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the firms that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.



L1: This may be an updated version, seemingly once again the FED will pick up the bill, or more accurately the poor long suffering US taxpayer, that wont half ratchet up the money supply and inflation--Should be a fascinating night coming up--as the AUD nears parity with the US Peso, Gold flirts with USD1000.

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I am an official skeptic ....


Mind you with good reason.


The clown called Paulson so far has come up with three plans to save the day.


This one has the least chance of all three to make a bit of difference.


Back In August 2007 the market had a sharp sell off and it was due to the sub prime issues and there was a plan launched by ... PAULSON head of treasury ... to save the sub prime market and for a few large banks headed by Citibank and a few others to directly buy the Sub prime paper and save the day. The plan never eventuated because the quality of the paper was so shocking to start with it was an absurd plan to start with.


Bottom line the US doubled house prices between 1994 and 2000 then between 2000 and 2006 doubled them again. Early 2007 add another 8 % and thats what they had. A housing bubble where the top cities had AVERAGE house prices well over US$1- million vs an average income of US$50- k for them. Miami and Las Vegas spring to mind with parts of San Fran up there and around LA similar sorts of numbers.


Market however back in August took it all in its stride and rallied off this plan.


Plan NEVER happened ... but market hit new highs .... in fact some of the banks have been crushed with write downs on the paper they held even prior to this first plan. Citi has been forced to ask the market not once not twice but three times for capital and likely number 4.


So when this became clear how insane and stupid the plan was in the first place a few weeks later down she went again ... and In January it was the Bond insurers and mono-line insurers .... and again ... PAULSON head of treasury rode in to save the day. Plan to raise capital for them and preserve the status quo .... again this failed and the AMBAC and MBIA bond insurers are basically dead ducks ..... That was plan number two ...


Bear Stearns was a blip in march with the fed riding in again to save the day ....


So here we have plan number 3 ...


Market likes it .... Pity Big Kev is not still around to sell it.


Sadly its even more delusional than plan number one and number two. Sure maybe the US govt rides in with funds and takes things over. Thats nice ....


All thats being talked about is the amount needed right now and US$75- billion for now.


Sadly .... when you take house prices from 250k to 500 k to 1 million and beyond via cheap loans with introduction rates of 1% for the first 3 years and then 4% next 2 years then 8 % the next ... we have a problem.


All of this aside .... the very wide 20 city index of prices is off 17% after rising 110% since 2000 so at best it has another 10% to fall even further more likely 15% and thats if things hold together. Things got that out of hand !!!


Right now there are 3 million out of around 60 million homes in total default on their loans.

Doesn't sound like much but if they can keep them in their houses and not sell into an already weak market it might preserve things for a while. Does not change a little factoid ...



Sadly the doomed plans of before I suspected were hot air ... this one I suspect not because the US government gets dragged into the mess and the S+L crisis was a mere US$50- billion sort of bill ... this one ....


3 million in total default ....


How many houses are holding negative equity right now on their loans ?


How much negative equity is the average ?


most conservative number I found was 10 million homes with an average negative equity of something approaching 60k each or .... $600- billion this is if house prices stopped right here.


So when they talk about injecting funds of US$50- billion to shore them up or $75- billion understand the problem is currently I suspect 600 billion and if they stop say 10% lower than here its a $1- trillion dollar black hole.


Does US govt sigh the blank cheque for this number ? Or is it like the first plan for the banks to buy the paper in the first place ? A load of hot air ?


Or the plan to save the bond insurers ? Hot air again.


Things are this serious ..... so any meaningful recovery anytime soon I suspect as stupid as the last two.


What is not being talked about ... is the commercial property debt which is exactly the same size as the residential in terms of how far prices rose and the amount outstanding grew and the total dire lack of quality underlying it. To date 90% of the write downs have come from one area .... residential home loans whether they be sub prime of too leveraged prime loans which had too little equity to start with. Commercial property is the not talked about bigger problem even if they sweep this one under the carpet.


Add to this the leveraged buyout stuff ... this debt like residential like commercial exploded and idiots were willing to pay premium prices for assets and it only worked with low cost of credit being able to borrow at 1% over US treasuries when you wanted to pay $6- for a company like Qantas does not work .... does not work at all when the current cost of such a deal would be 4/5/6% over ... what it always should have been. Qantas now a $3.25 company I think shows the dire lack of quality underlying the US$5- trillion added to corporate debt last 10 years . Not all of its rubbish but the takeover a day of 2004/5/6/7 in many cases was paying silly prices for assets.


Right now the US by keeping its rates so low has in some ways delayed the problem for the US corporates. Investment banks who desperately wanted assets and were able to raise funds at 3% and create the recurring incomes like Macquarie by charging fee's to manage them when the cost of funds was 3% for a commercial loan buying an asset that returned 5% like an office block made some sense. Sadly they all went insane credit margins for risky stuff never should have been there in the first place.


The asset quality underlying the corporate and financial side is so bad its scary. If the cost of funds has gone from 3% to 5% or higher the level people are willing to buy these commercial assets is still 2-3% higher than the cost of funds. When something you were willing to buy for 5% has moved to 7% or 8% it involves a massive move in the underlying price.


None of this has been shown to date and its 90% a pure residential problem or so we would have you believe. Australia has already had the blow torch applied to our over leveraged types for the simple reason when the credit spreads blew out instead of like the USA lowering rates by 3.25% so the actual cost of funds did not explode we raised rates to adjust for inflation and the fact inflation went from 2% to 4% in the USA and it cut rates is just one of my little peeves right now. not suggesting they should have raised rates but the US stopped reporting increases in inflation when oil was US$55- for the GDP deflator and CPI and PPI still show a price of oil sub US$100- due to unprecedented seasonal adjustments.


Remains to be seen whether the rest of the world puts up with this much longer.

In Dec 2007 US CPI was 4.1% and US petrol was US$2.67 per gallon and in May according to them the CPI is still 4.2% yet the price of petrol right now US$4.10.


All an aside ...


so they save these ones ?


Well the bill will be far far larger ....


Does not change the fact inflation is out of control and if the US has to raise rates it will not change the fact these loans handed out like candy to every idiot investment bank for a decade and commercial property developer make the sub prime issues and price of residential property look good the 17% fall.


When idiots can get loans at 3% and are prepared to buy things with 5% returns ... when they can not even borrow at 5% a move from 5% yield to 7% yield means ... a 40% fall in price ... thats how idiotic things got.


Residential side ... 10 million with negative equity .... interesting to save the day ... still will take years to sort this mess out.


In the meantime the festering rotting corpse these financials loans on LBO's and LPT's and Investment bank leveraged unit trusts will eventually implode. As their current funding rolls off and is replaced with realistic pricing 3/4/5% higher if they are lucky or if not the banks start to question the value of assets underlying the loans.


This plan to save the day .... prop up another cadaver is number three and I suspect despite the initial reaction of the market to take it higher the rally this time is not anywhere

near the idiocy seen in the past.


Sadly its like trying to revive a Roo thats been on the side of the road for a week in summer and its bloated and kissing it on the lips is what the Us authorities are trying to do to stave off the inevitable.


Doom and gloom yes .... sorry but the problem has so many heads and trying to put one down and ignoring the others is not going to work longer term.


Debt in the USA in 1998 was 250% of GDP and in 2007 its 400% of GDP. this debt binge and residential is just 25% of the growth .... 25% .... is the problem. All we have looked at till now on the US side is 90% made up of the 25% residential side.


Lowering rates or pumping as much money as you like into things does not change the fact the lending practices of 1998-2007 and resulting housing price explosion, equity market explosion and commercial property price explosion where commercial property doubled every 5 years from 1994 ... faster than residential.


Keep rates at 2% ... its does not change the underlying quality of the borrowers and their ability to repay.


Adding 150% of GDP to the debt pile in 10 years was insanity and the solution ?

Lets borrow some more. record US govt deficit. Baby Boomer's Social Security and Medicaid instead of having 45 trillion in the bank they spent it and there is just 3 trillion for when the baby boomer's born 1946-60 retire coming 2011 in ever increasing numbers.


we shall see where this PAULSON plan ends but my strong feeling its the most absurd of the 3 to date . Lets save the Roo !!




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A bit of light reading.

Naw, it's not a recession


Bob Moriarty


July 14, 2008


Naw, it's not a recession. It's a depression for sure. Those who have been reading me for the last year or listening to my radio interviews have been forewarned. The rest of the market is just now waking up.


Last Friday, July 11, 2008 after a 99% decline in the price of IndyMac from $36 a year ago to $.28, the FDIC announced seizure of the bank. It's the second largest bank failure in US history. But it won't be for long.


Fannie Mae and Freddie Mac have their heads on the chopping block and they are next. Along with Lehman Brothers, Bank of America, UBS and loads of others. They are all underwater and have been for a year.


I'm 61 and the single most important day economically in my entire life was August 15, 1971. That's the day Nixon broke the last tie between the US Dollar and gold. It was the kiss of death for the dollar because it allowed both governments and consumers to go on a wild spending spree: all believing they could write checks that would never be cashed. Well, it's time to balance the books and the books have been cooked.


Soon, maybe this week, the US government is going to announce nationalization of Fannie Mae and Freddie Mac. They are leveraged 65-1. That will be the most important financial day in your lifetime. It will be the end of the US dollar and our Republic.


Here's what it means. The US Government is going to take over $5.3 trillion dollars worth of mortgages, most of which are underwater and will never be paid. The theory is that the US will make Fannie and Freddie paper good by making it as good as US Treasuries. Actually the opposite will happen.


Imagine that you have a giant 100-gallon punch bowl filled to the brim with delicious tasting Rum Punch. And someone drops in a tiny turd. What does the next glass of Rum Punch taste like? Right.


The US government is on the verge of turning their nearly worthless paper into used toilet paper. Nationalization is a vote for hyperinflation.


But a total collapse of the financial system is not the biggest problem we face. In 1995 Israel decided they weren't able to steal enough land from the Palestinians via the peace process so they made a "Clean Break from the Peace Process." In effect, they would destroy anyone within a thousand miles who might ever be a threat to them.


The Mossad (Motto: By Way of Deception) began circulating rumors of an impending Iranian nuclear weapons program as early as 1987. So when our US Sock Puppet George Bush starts talking about the Iranians coming up with a nuclear weapon any day now, he is doing nothing more than acting as an unpaid agent for the Mossad.


The Persians have a better sense of history than George Bush. But then, a rock has a better sense of history than George Bush.


A short search on the Internet brings up an interesting analogy to what is going on today.


The expression "as rich as Croesus" comes from the legendary wealth of the king who reigned from 560 to 546 BC over Lydia in western Asia Minor. Gold from the mines and from the sands of the River Pactolus filled his coffers to overflowing. The Lydians in the time of Croesus, it is believed, were the first people to mint coins as money.


The fame of the splendid court of Croesus at Sardis attracted many visitors. One of these, according to a legend, was Solon, the lawgiver of the Greeks. The king proudly displayed his treasures and asked Solon who was the happiest man that he had met. Solon named two or three obscure men who had lived and died happily. Croesus was surprised and angry and said: "Man of Athens, dost thou count my happiness as nothing?" "In truth," replied Solon, "I count no man happy until his death, for no man can know what the gods may have in store for him."


There was indeed great misfortune in store for Croesus. Cyrus the Great of Persia, extending his vast domains, was soon threatening the kingdom of Lydia. Croesus consulted the oracle of Delphi in Greece. The oracle replied: "If Croesus goes to war he will destroy a great empire." So Croesus went out to meet the army of Cyrus and was utterly defeated, he destroyed his own great empire.


The President of Iran and most of the world understand what Clueless George and Israel do not. If the US attacks Iran or allows Israel to attack Iran, a great empire will be destroyed. Maybe one and a half, counting Israel.


On that joyful note, may I suggest that you seek safe haven while you still can? In all of history, when evil was about, gold and silver in physical form served as a good insurance policy. If you do not have some physical gold and silver in your possession, you don't get it. Times are about to get as bad as they have ever been in history. Seek shelter from the storm.


But you can't put all your money in physical gold and silver and I wouldn't advise it anyway. So you need to be looking for another safe haven and in my view, the only alternatives are resource shares. I'm convinced we are going into a depression, the plunge in nickel, lead, zinc all point to the same. Oil is about to crash for similar a reason. The only thing keeping it elevated at these prices is an impending war on Iran. If that takes place, $147 oil is going to look pretty cheap.


The very best and safest resource stocks to be in are actual producers or those with a production story. The pure exploration stories are not going to be as safe even if they do share in the rush to safety movement I see ahead. Ounces in the ground are going to start looking like the only sane real estate investment around.

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