Fannie Mae, Freddie Mac Turmoil Pose New Economic `Headwind'

[marmar]

from Bloomberg:



Fannie Mae, Freddie Mac Turmoil Pose New Economic `Headwind'

By Matthew Benjamin and Craig Torres

July 12 (Bloomberg) -- The slides in Fannie Mae and Freddie Mac, the largest providers of U.S. mortgage financing, threaten to deepen the economic slowdown by curbing credit to a housing industry already in its worst recession in 25 years.

The two companies' shares reached the lowest level in more than 17 years yesterday, making it tougher for them to raise capital at a time when they account for about 80 percent of mortgages packaged into bonds. A failure of the companies would likely send home loan rates higher, causing further declines in home sales and prices.

The dangers mean the Bush administration, which yesterday indicated a government takeover isn't needed, must be ready to keep the companies afloat, investors said. Lawmakers aim to take up a housing bill next week to help buttress confidence in Fannie Mae and Freddie Mac.

``There is no way the federal government is going to let either of those agencies die,'' said Eric Hovde, chief executive officer of Hovde Capital Advisors LLC, which runs a $1 billion hedge fund. ``You can't take housing, which is the most important asset class in the country, and mortgages, which are the largest debt markets, and destroy them.''

Fannie Mae and Freddie Mac own or guarantee about half the $12 trillion in U.S. home loans outstanding. Even if the government steps in with some type of rescue, mortgage rates may rise as much as half a percentage point as the cost of selling mortgage-backed securities rises, said Keith Gumbinger, vice president of mortgage research firm HSH Associates in Pompton Plains, New Jersey. ........(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=a1awX5uIRoFA&refer=home

[disndat]

1. The 'Banana Republic' scenario.

Bush & Co. has succeeded in their quest to turn the U.S. into a banana republic oligarchy where the people become peons controlled by the few remaining wealthy Wall streeters. It looks like BushCo has succeeded in driving the country into a deep economic hole so that an economic recovery will be impossible for the succeeding Democratic leader (Obama) to pull us out. Eventually a white knight (no irony intended!) will take over the Democratic leadership in the form of a neo-Reagan, by scapegoating the blacks, immigrants, gay marriage, or all of the above. Then the neo-Reagan leader will lead the country into another unnecessary war and a savings and loan type bail-out, so we will have deja vu all over again.

[soothsayer]

2. Fannie doesn't need to raise capital--they already did in Nov and May.

Freddie needs to but not in any hurry, as they raised a bit in Nov/Dec too. Fannie has $46B or so---wayyyy more reserves than are required.

[El Pinko]

3. Hopefully, when prices have corrected to justifiable levels (3x median income)...

...less credit will be necessary for people to buy homes.

When a typical 1960s 3 BR tract house in the San Fernando Valley goes for $200K, I'll believe that housing has bottomed.

The economic fallout from this is going to suck for everyone, but the trend in the 2000s of people with $50k incomes buying $500k houses with exotic loans was NOT a good thing for our economy either. I for one am glad to see it coming to an end.

Now I just hope our new leadership will help steer investment into PRODUCTIVE areas of the economy instead of goading people into flipping and speculating on housing.