Dear old Fannie & Freddie

Fannie Mae and Freddie Mac are synonymous with the US housing bubble and the following credit crunch and banking collapse. They were a direct player in lending money to those who couldn't afford housing and were among the first institutions to go down the tubes.

Directors were cooking their books to make their balance sheet look good and as we know they would have disappeared if not for that nice man Barrack Obama bailing them out with borrowed money.

I knew they were still around in some capacity but I had no idea they were still up to their old tricks.

An email from their PR people to me (not sure why it was sent, it was unsolicited):

Resource Center: 1-800-732-6643

Contact: Jason Vasquez

202-752-2878

Number: 5065

Date: June 17, 2010

Fannie Mae Launches New Series of “Five Step” Guides to Help Educate Homeowners and Potential Home Buyers

First Three Tip Lists Focus on Home Buying, Housing Counselors and Mortgage Modification Scams

WASHINGTON, DC -- Fannie Mae (FNM/NYSE) today launched the first three in a series of “Five Step” guides, offering useful information for current homeowners, those interested in purchasing a home and homeowners who may be struggling with their current mortgage. Each guide focuses on a different topic and provides five specific tips.

The first three guides released today provide tips on the following subjects:

· Actions to Take Before Buying a Home - As the housing downturn has shown, homeownership is about more than buying a home. It’s important to make sure you can keep your home over the long-term. Fannie Mae offers five steps to help those thinking about buying a home select the right house for them and understand the affordable financing options that can help make homeownership a long-term success.

· How Housing Counselors Can Help – Whether you’re thinking about buying a home or you’re a current homeowner, Fannie Mae highlights five key ways housing counselors can help make homeownership successful for you. Housing counselors offer professional advice, ensuring you can sustain your home purchase over the long term and providing guidance if unforeseen circumstances make it difficult for you to continue paying your mortgage.

· Protect Yourself from Mortgage Modification Scams – Mortgage modification scams can occur when unscrupulous people prey on borrowers who are struggling to keep their homes. While they promise to help, the people who perpetuate mortgage scams do little to no work, charge excessive fees, and use tactics that often put the homeowner at greater risk of losing their home. If you’re modifying your mortgage or facing foreclosure, Fannie Mae offers five keys ways to protect yourself from mortgage rescue scams.

The guides are available at http://www.fanniemae.com/kb/index?page=home&c=fivesteps.

###

Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.

It seems Fannie is still chasing those individuals who are unable to pay off housing over the long-term and therefore it wont be long before the 2008 crash and what followed will happen again.

Fannie of course was set up after the Great Depression in the early 1930s and Freddie in the 1970s, to do exactly what it is doing today.

I am not surprised by the stupidity of the repetition of this nonsense but am constantly amazed that the consequences of not learning from the past are forgotten so quickly.


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Will the stalactites hold?

The financial meltdown has been making a mess on stock exchange floors and business boardrooms globally but nothing that has been tried so far seems to be freezing the tide of red ink.

Since the financial crises that kicked off in August 2007 it has beset markets and financial institutions all over the world, stock markets have lurched upwards, downwards and sideways since and seemingly at the whim of the market regulators in the United States.

The next collapse of a Bear Stearns, Northern Rock, Lehman Brothers or another New Zealand finance company seems just around the corner-if Bear Sterns Fannie and Freddie and Lehman Brothers have gone the way of the dodo, you can bet other Wall Street firms who have been drinking at the easy credit trough and lending to others whose assets are of dubious value are going to head the same way.

Last week a massive bombshell, one that has been on the brink for the best part of seven years, Fannie Mae and Freddie Mac finally collapse and the US Federal Government will pile 100s of billions of taxpayer dollars into it hoping to stem the flow.

All this has had a chilling effect on the credit market, the lifeblood of business, between financial institutions and other business and between individuals.

Heads of powerful investment banks have still not come clean about their exposure to the sub-prime derivatives market to in what Warren Buffett has called "financial weapons of mass destruction" and we continue to see new revelations everyday about previous cavalier attitudes to lending, and borrowing, coming home to roost.

The value of these derivatives in the Fannie and Freddie collapse are relevant to the bleak outlook for world markets and the global economy and likewise the recent Lehman Brothers meltdown.

Optimism is well overrated in this market because the bubble of optimism keeps getting pricked.

Even Warren Buffett's assurances that the Federal Reserve did the right thing bailing out Fannie and Freddie had me worried.

It seems a tad self serving to me on his part considering he usually keeps his mouth shut and claims not to like the limelight-seems to me he has been popping up everywhere in extended interviews, ball games, TV shows and the like over the last year or so, most uncharacteristic of him and his style in the past.

My feeling is that investors are set for at least another year of this cloak and dagger stuff.

The market has so far been propped up by taxpayers around the globe-directly to help ailing banks and indirectly to allow cheaper credit to flow through financial markets and ease the pressure on doing normal business.

There is no sign yet that this approach has or will work in the future, having said that, the vast increases in new and different financial instruments in the 1990s and early 2000s and the resultant surge in speculation and bull runs in sharemarkets took time to reach their nadir.

Perhaps now that the bubble has burst it will take just as long to recover from the hangover than the credit binge party itself.


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c Share Investor 2008

US TREASURY PRESS RELEASE: Fannie Mae and Freddie Mac

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The following information is a press release from the US treasury less than 30 minutes ago.

It defines effectively that the US Government(taxpayer) is taking control of Fannie and Freddie.

It means that half of all US mortgages are now State managed and backed.

It also means that the private housing market in the US has collapsed-the taxpayer bailing out the company doesn't mean it hasn't, whatever US Government officials are telling Americans, and the rest of the world for that matter.

It is important that investors re-assess their investments at this juncture and structure them according to the risk and current economic climate in view of this latest news.

WASHINGTON (Sun Sep 7, 2008 12:57pm EDT) The following is the full text of a statement released on Sunday by Treasury Henry Paulson on mortgage finance companies Fannie Mae and Freddie Mac: Good morning. I'm joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency,

FHFA. In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure. Based on what we have learned about these institutions over the last four weeks including what we learned about their capital requirements and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve. We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection. Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions. I support the Director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs. I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.

GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition. I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability. To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size. Treasury has taken three additional steps to complement FHFA's decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities.

Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders senior and subordinated and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

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c Share Investor 2008

Not so sweet Fanny Mae

The Fannie Mae and Freddie Mac saga is big by world standards.

Trillions of dollars of mortgages are involved, in fact the firms between them own or guarantee about half of the $12 trillion in U.S. mortgages.

I asked a question about 6 years ago, what would happen if these two institutions tipped over? This was in the light of many US companies involved in "accounting irregularities" at the time and that Fannie and Freddie was a possible inclusion.

The immediate cause of the problems that became public at Freddie Mac in 2002 appeared to be accounting properly for the use of derivatives, what Warren Buffett has called "financial weapons of mass destruction". Under the previous accounting procedures, income for the years 2000, 2001 and 2002 was understated, with income for the future overstated. Freddie and Fannie management decided that this method would be used to “smooth out” earnings, providing reassurance to financial markets and leading ultimately to lower interest rate costs.

The President of Freddie Mac was sacked for his part in the company's "accounting problems".

While assets of the 2 big macs went up in value, via customers house prices, there wasn't a problem, but as the sub prime saga unfolded property prices were hit and Fanny and Freddie now have a big cash flow problem. They are essentially insolvent.

I now know the answer to my question and it ain't a pleasant one to stomach, especially given the problem was painfully evident years ago.

These entities will probably go under without US taxpayer funds being pumped into them and the current credit crises that the business and financial world is experiencing will get considerably worse and there would probably be a contagion effect with other banks going under. The derivatives market upon which most of Fannie and Freddie's business is backed, would unwind and explode upon other financial institutions holding theses derivatives as assets, some of them the ones we have already seen in the news and some we haven't heard from yet.

As the planet is facing tough economic times at present, for Fannie May and Freddie Mac to go under would no doubt cause a massive recession the likes of we haven't seen in generations so one could understand why Henry Paulson and the Fed are looking at bailing these turkeys out.

But, and its a big giant butt, why should the US taxpayer have to bail out even more financial institutions, this time possibly to the whopping tune of US$1 trillion?

The answer is that they will take the rest of us down with them if nothing is done. Hard to stomach, given those that didn't binge on cheap debt and over spend, were not the ones who took the risks in the first place but will suffer anyway.

In New Zealand our mainstream lenders haven't been as reckless, however, the present Labour government wants to start our own sub prime lending, so it could be a problem for us in the future.

Kiwis would be affected indirectly though by a collapse of the two macs, so it is an important story for New Zealand and every other country because a collapse would affect our fragile economy and faith in markets, lending and business even more than it already has.

The bizarre thing is though, while we have been flooded with Tony Veitch and Winston Peter's stories, coverage by our local media over Freddie Mac and Fannie Mae has been largely relegated to small pieces in the businesses pages and biz segments on TV news, not in the mainstream news, where it clearly deserves to be.

Confidence in the economy is much needed right now, Fannie and Freddie have knocked it about again. What Henry Paulson does in the next few days is going to be the difference between a complete meltdown and the status quo.

Unfortunately, I fear there are more Freddies and Fannies to come.

That just ain't sweet.

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c Share Investor 2008