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    Fannie, Freddie `Insolvent'

    Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

    ``At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'' Peter Bookvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. ``We're getting to that point where a decision has to be made by Washington.''

    Links:
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    U.S. Mulls Future of Fannie, Freddie - WSJ.com


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    Re: Fannie, Freddie `Insolvent'

    well that is what happened when the gov;t was making them clean up the subprime mess. It will be interesting to see how much federal support they get.



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    Re: Fannie, Freddie `Insolvent'

    They were acting as mortgage banks and were under less stringent regulations (especially for capital) than regular banks are.

    I read recently that if they were real banks instead of quasi-governmental entities, they would need to have 5 or 6 times the capital than what they currently have.



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    Re: Fannie, Freddie `Insolvent'

    More from the WSJ:

    What Americans need to know is how damaging such a failure would be. This wouldn't merely be a matter of the Federal Reserve guaranteeing $29 billion in dodgy mortgage paper, a la Bear Stearns. Fannie and Freddie are among the largest financial companies in the world. Their liabilities – mortgage-backed securities (MBSs) and other debt – add up to some $5 trillion.

    To put that in perspective, consider that total U.S. federal debt is about $9.5 trillion, compared to a total U.S. GDP of $14 trillion. About $5.3 trillion of that debt is held by the public (in the form of Treasury bonds and the like), while $4.2 trillion is intragovernment debt such as Social Security IOUs. This is the liability side of America's federal balance sheet, and its condition influences how much the government can borrow and at what rates.
    The liabilities of Fan and Fred are currently not on this U.S. balance sheet.

    But one danger is a run on the debt of either company, putting pressure on the Treasury and Federal Reserve to publicly guarantee that debt to prevent a systemic financial collapse. In an instant, what has long been an implicit taxpayer guarantee for both companies would be made explicit – committing American taxpayers to honoring as much as $5 trillion in new liabilities. U.S. debt held by the public would more than double, and the national balance sheet would look very ugly.

    Link:
    The Price of Fannie Mae - WSJ.com


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  5. #5
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    Re: Fannie, Freddie `Insolvent'

    They should have been held to the same regulatory standards as banks to start with...

    This sounds like a bit of a replay of the S&L's of the early 90's - weak regulatory bodies didn't concentrate on safety and soundness leading to a massive bailout.



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    Re: Fannie, Freddie `Insolvent'

    aka, we'd go into a depression vs a recession.



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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by crash_zone View Post
    aka, we'd go into a depression vs a recession.
    How about a thermonuclear war??? As long as we're making up stuff, and misusing terms like "recession" and "depression", I've decided that we are ACTUALLY in the middle of a thermonuclear war....

    I mean, if "I" think things are bad, I can call them whatever I want. So, the US is in the middle of a thermonuclear war.

    So there....


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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by Phaedrus View Post
    How about a thermonuclear war??? As long as we're making up stuff, and misusing terms like "recession" and "depression", I've decided that we are ACTUALLY in the middle of a thermonuclear war....

    I mean, if "I" think things are bad, I can call them whatever I want. So, the US is in the middle of a thermonuclear war.

    So there....
    I don't know what ur definitions are, but I was fairly confident on saying that recession is a economic downturn, while a depression is a more sever economic downturn (GDP declines by more than 10 percent). Who knows, maybe I'm wrong....



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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by crash_zone View Post
    I don't know what ur definitions are, but I was fairly confident on saying that recession is a economic downturn, while a depression is a more sever economic downturn (GDP declines by more than 10 percent). Who knows, maybe I'm wrong....
    Well, a recession is two consecutive quarters of negative growth. Which we haven't even had, yet.

    I know!!! I think we are in a MONGOL INVASION!!!!!!!

    Either that, or an election year


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    Re: Fannie, Freddie `Insolvent'

    It's pretty safe to say that the Gov't can not let them fail without backing up the paper. If they do not guarantee the paper, the Dow go to 5,000 and we will see a recession of epic proportions. With that being said, what's the govt's exposure and what will happen to the GSA's?

    There is $5T worth of paper. Worst case scenario, it's worth $4T, but more than likely 4.5T. But just because the collateral is not what the notes are for is not the end of the world. Easily over half the car loans in this country are in that situation every day. Just because people are upside down doesn't mean they are going to walk away. Obviously if they can't pay for it they will but that seems to be an issue primarily with the subprime and teaser rate ARM's, and on the west coast where values are down by up to 50% So it really boils down to the quality of paper and the amount of cash flow necessary to service the debt. Losses could total $500B, which seems like a lot until you figure what we've spent in Iraq and what the current national debt is. However, one has to take into account income from the performing portion of the portfolio so the net negative cash flow would be much less. If the government ends up with the paper, they can work their way out of it because they are the government. If they are selling treasuries at 3%, I'm pretty sure they could sell mortgages for a heck of a lot more. And if they instead took those houses which have lost nearly half their value and offered 3% mortgages on them, the resale value would quickly recover.

    From the GSA's perspective, at this point you can pretty much figure the equity is toast and the common stock shareholders are going to be left holding the bag. The companies will be recapitalized but the equity will be gone. Obviously the financial system still believes the govt. will guarantee the paper or there would be no way they could borrow money at 3.75%, especially considering current inflation fears.

    We can talk about insolvency all we want, but if the paper ends up in the hands of the people who own the presses which print money, the insolvency issue really doesn't matter so much.

    Bottom Line: The government will end up backing the paper or lending the GSA's money. If they end up with the paper, they will hold on to it until the values appreciate - either by the return of a healthy economy or inflation. But don't touch the common shares of the GSA's with a 10ft. pole unless you're going to sell them short.



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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by TykeClone View Post
    They should have been held to the same regulatory standards as banks to start with...

    This sounds like a bit of a replay of the S&L's of the early 90's - weak regulatory bodies didn't concentrate on safety and soundness leading to a massive bailout.
    Hmm, say 20-25% of current homeowners would not be owners
    without the help of these two entities. Tougher rules would have meant fewer owners. Many of these mortgages supported minorities buying also. Right now these two groups are involved in half of mortgage transactions. The fallout without them is fewer buyers and drop in house prices. Not good for most owners.


    CFH HMagic bball season next year.
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  12. #12
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    Re: Fannie, Freddie `Insolvent'

    Ok, I have never paid attention to these companies, but how do these two work? Why do we need a government bank doing mortgages?

    Why not just forclose on all those bad loans, drop the house price 10% and start selling them? Drop the price enough and people will buy it. I will move if the price is right.



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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by usedcarguy View Post
    It's pretty safe to say that the Gov't can not let them fail without backing up the paper. If they do not guarantee the paper, the Dow go to 5,000 and we will see a recession of epic proportions. With that being said, what's the govt's exposure and what will happen to the GSA's?

    There is $5T worth of paper. Worst case scenario, it's worth $4T, but more than likely 4.5T. But just because the collateral is not what the notes are for is not the end of the world. Easily over half the car loans in this country are in that situation every day. Just because people are upside down doesn't mean they are going to walk away. Obviously if they can't pay for it they will but that seems to be an issue primarily with the subprime and teaser rate ARM's, and on the west coast where values are down by up to 50% So it really boils down to the quality of paper and the amount of cash flow necessary to service the debt. Losses could total $500B, which seems like a lot until you figure what we've spent in Iraq and what the current national debt is. However, one has to take into account income from the performing portion of the portfolio so the net negative cash flow would be much less. If the government ends up with the paper, they can work their way out of it because they are the government. If they are selling treasuries at 3%, I'm pretty sure they could sell mortgages for a heck of a lot more. And if they instead took those houses which have lost nearly half their value and offered 3% mortgages on them, the resale value would quickly recover.

    From the GSA's perspective, at this point you can pretty much figure the equity is toast and the common stock shareholders are going to be left holding the bag. The companies will be recapitalized but the equity will be gone. Obviously the financial system still believes the govt. will guarantee the paper or there would be no way they could borrow money at 3.75%, especially considering current inflation fears.

    We can talk about insolvency all we want, but if the paper ends up in the hands of the people who own the presses which print money, the insolvency issue really doesn't matter so much.

    Bottom Line: The government will end up backing the paper or lending the GSA's money. If they end up with the paper, they will hold on to it until the values appreciate - either by the return of a healthy economy or inflation. But don't touch the common shares of the GSA's with a 10ft. pole unless you're going to sell them short.

    Maybe Abu Dhabi or China can buy them out.


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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by Wesley View Post
    Hmm, say 20-25% of current homeowners would not be owners
    without the help of these two entities. Tougher rules would have meant fewer owners. Many of these mortgages supported minorities buying also. Right now these two groups are involved in half of mortgage transactions. The fallout without them is fewer buyers and drop in house prices. Not good for most owners.
    If that's the case, we wouldn't have seen the housing bubble, and the economy would be in better shape now than it is.

    The fact is that these entities played fast and loose with their lending standards and it's coming back to bite them. And by that I mean that it's coming back to bite us.



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    Re: Fannie, Freddie `Insolvent'

    Quote Originally Posted by Wesley View Post
    Hmm, say 20-25% of current homeowners would not be owners
    without the help of these two entities. Tougher rules would have meant fewer owners. Many of these mortgages supported minorities buying also. Right now these two groups are involved in half of mortgage transactions. The fallout without them is fewer buyers and drop in house prices. Not good for most owners.
    Actually a big drop in house prices is good! Sure it wipes out some equity, but unless you move who needs that anyway? Plus it makes houses more affordable for everyone which is good.

    So say all house prices fall 50%. My current house is worth 200k, now it is worth 100k. The house I want is 400k but falls to 200k. I sell mine for 100k and take a loan for another 100k and get a new one. So basically I took half the loan and got the bigger house. Sounds like a win win. Sure it hurts those who are downgrading, but helps those who are upgrading. And more people are upgrading than downgrading.



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