Yesterday Freddie Mac, Fannie Mae Plunged on Capital Concerns.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.

Lie of the Day

Unsurprisingly, the lie of the day today is Fannie, and Freddie are Adequately Capitalized.

Mortgage financiers Fannie Mae and Freddie Mac are adequately capitalized and continue to be active in the mortgage market, said James Lockhart, director of the Office of Federal Housing Enterprise, which regulates the two enterprises.

“Both of these companies are adequately capitalized, which is our highest criteria,” Lockhart said in an interview with CNBC. “They have been very active in the mortgage market, and they are continuing to be. And, in fact, Congress has put on them the requirement to do jumbo mortgages and they have been doing those as well.”

Fannie Mae holds or guarantees over $5 trillion in mortgages. A mere 1% decline would wipe them out. Is that adequately capitalized? I do not think so and neither does Minyanville’s Kevin Depew.

We’re All Homeowners Now

Here are two video links on the impending nationalization of Fannie Mae.

We’re All Homeowners: Nationalization of Fannie, Freddie Unavoidable

DepewTube: Nationalizing Fannie and Freddie

Fannie Mae and Freddie Mac are not adequately capitalized even if the housing market turned around today. And it’s not going to turn around today“.

Separately Bloomberg is reporting Freddie, Fannie Don’t Need More Capital, Ofheo Says.

“It concerns me that people sort of extrapolate well beyond what the facts are,” Lockhart said. “Fannie and Freddie are continuing to do their job in the marketplace. They were created for just this type of marketplace and they are continuing to fulfill their function.”

Fannie Mae and Freddie Mac, created by Congress to increase homeownership, have become one of the few avenues for new mortgage financing as competitors scaled back last year amid record increases in delinquencies and defaults. Their share of the conforming mortgage market, or new loans of $417,000 or less, almost doubled to 81 percent in the first quarter.

Fannie Mae Has Failed Its Mission

The second lie of the day is that “Fannie and Freddie are continuing to do their job in the marketplace.” Nothing could possibly be further from the truth.

There is a rock solid Case for Abolishing the FHA and GSEs for many reasons. Here are some of them:

  • Fannie Mae has failed to help make housing affordable (its primary mission)
  • Fannie Mae’s CEO was forced out in disgrace
  • Fannie Mae and Freddie Mac were both involved in multi-year derivative scandals where they had no idea what their derivative books ever were.
  • Government sponsorship of housing is absolutely guaranteed to drive up prices (until things implode as they did in the US).

And most importantly the government has no business promoting housing over renting for any reason. Such promotion causes bubbles and the biggest bubble in history is now imploding. If ever there was a complete model of precisely what not to do, the US government sponsorship of Fannie Mae and Freddie Mac would surely be on the list.

Mike “Mish” Shedlock
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