Treasury to "recapitalize" Fannie and Freddie

[Bradley in DC]

http://seekingalpha.com/article/9132...e-bag-barron-s

[torchbearer]

am i reading this right? the government will be buying the preferred shares in fannie/freddie?
nationalizing?

[GunnyFreedom]

am i reading this right? the government will be buying the preferred shares in frannie/freddie?
nationalizing?

That's exactly how I read it.

[danberkeley]

At least the gov'ment is doing this for our own good. I mean... Freddie has dropped 18% today and Fannie has dropped 18% today.

[Paul.Bearer.of.Injustice]

They are just trying to sucker as many middle class people as possible to pump stock capital into these companies. Then they will burn them in the end.

[Johnnybags]

Overseas central banks have sold nearly $11 billion from their holdings of agency-related securities in the past four weeks, awaiting clarity on the extent and nature of U.S. government backing of the two faltering companies, known as GSEs.


Yes, the overseas central banks sold it but to who? And yes, as much sucker money as possible will be pumped in before the FEDS steal it. All bondholders should lose thier shirts as well.

[Johnnybags]

In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets

The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.

Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.

The mortgage bankers and brokers who survived were more cautious, but acknowledge they too were swept up in the housing hysteria to some extent.

"Everybody drank the Kool-Aid" said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn't give the borrower the loan they wanted, the borrower "could go down the street and get that loan somewhere else."

The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.

During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with "interest only" features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.

Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.

While some borrowers were aware of their risky features and used them to gamble on their home's value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.

Fucile, who is 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments, but says the mortgage broker who signed him up for the loan didn't tell him the principal balance could increase. It has risen about $24,000 to $276,000.

"He put me in a bad position," said Fucile, who fears he will be forced into foreclosure. "He misled me."

IndyMac was taken over by the Federal Deposit Insurance Corp. last month.

FDIC spokesman David Barr declined to discuss the Fuciles' case, but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif-based bank.

The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: about 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.

"It was pretty evident that the only thing that was supporting these loans was higher home prices" said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.

Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now is paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.

Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.

"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, "the home-buying public is going to have to pay."

Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.

Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.

Fannie Mae increased its purchases of liar mortgages "at the requests of many of our customers," according to spokesman Brian Faith.

Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.

Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.

But it's unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.

[torchbearer]

doesn't look good.

[AutoDas]

I thought Fannie Mae and Freddie Mac were approved by the government because it put people first and not profits.

[muh_roads]

I thought Fannie Mae and Freddie Mac were approved by the government because it put people first and not profits.

That is how it was sold to sheep asleep at the wheel.

Of all the things to protest and sign petitions over, war in iraq, etc....this bail out was just as equally important.

But that is what happens when the Dept of Education has you believing the Fed is a good thing.

[Kludge]

Surely this will be seen as a failure of capitalism, considering the gov't took a risk when they privatized F&F.

[Thrashertm]

burn baby burn

[Kludge]

burn baby burn

Eh, your FRNs aren't totally worthless yet

[torchbearer]

yet. but remember, its value is based on faith alone.
once the faith in fiat is broken, so is the dollar.

[123tim]

In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets.......Snip

I had never heard of "liar loans" before your post.
Just today I stumbled upon this news video on the same topic:

http://cosmos.bcst.yahoo.com/up/ynew...ars=no'));

[Johnnybags]

Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac's success in repaying $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout.

Fannie, based in Washington, has about $120 billion of debt maturing through Sept. 30, while McLean, Virginia-based Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.

Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies. Shares of Fannie and Freddie tumbled to the lowest since at least 1991, a sign that stockholders view a bailout as increasingly likely.

Rolling over the debt ``is the single most important factor to their ability to remain liquid,'' said Moshe Orenbuch, an analyst at Credit Suisse in New York. ``So far, they've been able to do that.''

Investors in Asia, the biggest foreign owner of Fannie's $3 trillion of bonds, are reducing their share of purchases, potentially increasing the need for Paulson to make good on his pledge to backstop the companies.

``This whole backstop mechanism was set up so the actual need for it could be avoided,'' said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. ``The market is testing the Treasury's resolve.''

New Capital

The companies, responsible for 42 percent of the U.S. home loan market, need as much as $15 billion each in fresh capital to reserve against losses on mortgages and related securities that they either own or guarantee, Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia, said.

The Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie and Freddie by the end of next month, according to Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co.

Freddie Mac ``continues to have strong access to the debt markets at attractive spreads,'' spokeswoman Sharon McHale said. Fannie spokesman Brian Faith declined to comment.

``Treasury is monitoring market developments vigilantly. We are focused on encouraging market stability, mortgage availability, and protecting the taxpayers' interests,'' Treasury spokeswoman Jennifer Zuccarelli said.

Fed Clash

Richmond Federal Reserve Bank President Jeffrey Lacker became the first Fed official to clash publicly with the Bush administration's strategy yesterday, saying the companies should be ``credibly and demonstrably privatized.''

[voytechs]

Nice trick. They are making interest payments on defaulting loans to hide the fact that the loans have defaulted. Yeah, like they can keep this up.

[ShowMeLiberty]

Nice trick. They are making interest payments on defaulting loans to hide the fact that the loans have defaulted. Yeah, like they can keep this up.

Sounds like a payday loan trap. Yeah, that always works for people who try it.

[Johnnybags]

preferred stock next month in the two fraudulent enterprises to keep them afloat. All bond,equity and preferred holders should be wiped out and the CEO outta make no more than the president of the USA. Ridiculous to have government invest in a private ponzi scheme.