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
Tony Bennett said:
“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.”
Mel Watt – head of FHFA – wanted looser standards and lower downpayment 3%.
Chickens coming home to roost.
“Fannie Mae could have and should have gone out of existence in 2008. Instead, the Fed blew another bubble. So, here we go again.”
True, and Republicans made some noise about spinning them off back then, but as usual nothing happened. Primarily, the Republicans (and Democrats) liked the fact that the GSEs started to make payments back to Treasury (which offsetted budget deficit so both parties wouldn’t have to cut back on their pet projects) … in fact, GSEs have more than paid back bailout. Now that the worm turning, look for the “noise” to grow, but that is all.
“The company, which was placed under conservatorship along with smaller rival Freddie Mac during the 2008 financial crisis, will have returned $147.6 billion in dividends to the federal government, according to a regulatory filing Friday. Washington-based Fannie Mae has received $116.1 billion from the Treasury since 2008.”
The fact is that private capital wants nothing to do with the US housing market. And why should they? Who but a FOOL would lend to busted US consumers for 30 years at under 4.00% against obscenely over-valued collateral? Of course that FOOL is the US taxpayer.
Well look the houses are falling apart there taxes are to high
The 2 companies have profit of $10-$20B a year. Seems like a pretty valid business, you just need to remove the government guarantee of their bonds.
These agencies have no place in the functioning of the housing market. all they do is borrow money above treasuries (at say around a 0.5% spread) and invest in pools of mortgages issued by banks at 3-4% whose individual mortgages have little or no statistical probability of default (probably zero for triple A tranches). The banks make around 1.5% per pool and the agency an illusory about 0.5%
The “pretend” profit to the agencies is the difference between the agencies credit spread of 0.5% and the agency mortgage pool spread of 1%. This is illusory.
Because of the implicit (or explicit) government guarantee, the banks simply create the mortgage pools and charge mortgagees 3-4% ten to thirty year mortgage loan rates and sell them to Fraudie and Funny at 1.5%.
For mortgage pools with a duration of 5 years times this 1.5% lower spread for the pool of mortgages v the 3% charged to individuals, this is an instant profit of 7.5% (5 years duration times 1.5% fall in yields or credit spread) per AAA pool.
The agencies can pretend they are making money from their spread v treasuries of 0.5% v the mortgage securities pool spread yield of 1% but the con is simply as described – a government agency is borrowing above the Treasury bond rate (more expensive and a direct interest cost to all tax payers – with mortgages or not) it then guarantees a profit to the banks for bundling the AAA mortgages.
The agencies spread should be zero above government and the pooled mortgage seurities should also be zero, adjusted for an initial set up fee – this is government assisted housing.
in the meanwhile, the burden of risk taking (albeit tiny) remains with the taxpayer and the marginal cost to all taxpayers (Fraudie and Funny borrowing margin of 0.5% above Treasuries) is combined with the dis-utility to the mortgagees who should be paying the same rate as the rate on US treasuries (plus a tiny admin fee to set up the mortgage). In other words, mortgagees should be the ten year Treasury rate of 1.8% and not the mortgage rate charged by the banks of, say 3.5% or 4%.
these agencies do not make any profit – nothing, zero, blank and only deliver back to Caesar what is Caesar’s – of course the people have elected their Government and so are supposedly willing supporters of their continued impoverishment.
But don’t ever call it a profit nor call it a return above a bail-out grant. fraudie and funny have 3 trillion in mortgages and are paying banks that 1.5% spread per annum ($45 billion per year) and are paying an extra spread above treasuries of 0.5% per annum ($15 billion per year).
After this “cui bono”, who pays? The mortgagees pay the 45 billion per annum and the taxpayers pay the 15 billion – decades of this fraud soon mount to trillions of dollars – the muppets who designed this scheme have the IQ of a small girls shoe size or are criminals.
While i am on the topic – have you wondered why an individual mortgage spread doesn’t diminish over time as the home equity increases and the mortgagee earns more money – thus improving their credit standing? – simply more fraud and/or inefficiency.
‘Here we go again’ is right.
How about letting the RE market find a bottom without government intervention or financial chicanery?
The next bubble burst will be epic.
The TBTF have been able to offload their morts to F&F thanks to the US/Fed created RE rebubble post 2006 meltdown so now it’s OK for RE to collapse – at least from the Fed/TBTF perspective.
The US must decide if they want to keep reloading F&F capital so they can keep RE inflated
Old Guy said:
I am a Member of NAHRO and the new HUD budget was increased 4 billion. 1.8 Billion was slated to make up for losses at FHA, USDA, Freddie, and Fannie. This is how the government makes up for losses at these institutions, they simply put them in government departments and people are none the wiser, I posted this before the new wordpress site.
The information is out there but it so hard to go through every department to find out what the increases are for.
Dan Haberman said:
Sarah – push the ‘Caps lock’ button on your keyboard.
I will delete any comments of hers that are excessively capitalized from here on out.
She has been warned – twice.
Pingback: Fannie Mae Needs Another Bailout | MyGovCost | Government Cost Calculator