Surprise, Surprise, Surprise, Not

Fannie Mae guarantees $3 trillion in mortgages. It has been bailed out once already.

Nonetheless, Fannie Mae’s capital buffer has dwindled from $30 billion to $1.8 billion. This happened in spite of a massive rally in home prices.

I have a simple question: What happens if home prices go down again?

Another Taxpayer Sponsored Bailout Coming Up

Please consider Fannie Mae at Risk of Needing Another Bailout.

Fannie Mae’s chief executive and its regulator are sounding the alarm on a decline in the institution’s capital cushion, which is on course to vanish in 2018, when it would have to ask the US Treasury for emergency funds.

Since 2008 Fannie Mae has been in the post-crisis limbo of state-sponsored “conservatorship”, neither fully nationalized nor private, following several unsuccessful attempts by Congress to overhaul it.

Because the government does not let Fannie Mae retain profits, Tim Mayopoulos, its chief executive, told the Financial Times on Friday that its capital buffer, which has dwindled from $30bn before the crisis to $1.2bn today, was on track to disappear by January 2018.

So far investors who own Fannie Mae’s mortgage-backed securities have not been spooked, Mr Mayopoulos said, but he added: “We are a major source of liquidity to the mortgage markets and it would be better to avoid testing the market as to what the breaking point is well in advance of us getting to that point.”

Here We Go Again

Fannie Mae could have and should have gone out of existence in 2008. Instead, the Fed blew another bubble. So, here we go again.

Mike “Mish” Shedlock