Mortgages Of The Apocalypse: Are Freddie And Fannie Going To Collapse?

Freddie Mac and Fannie Mae, the “government sponsored” enterprises that are supposed to bail us out of the current mortgage crisis, may be in danger of collapsing, according to William Poole, the former president of the St. Louis Federal Reserve, who told Bloomberg the companies are already “insolvent.”

As you might expect, this didn’t exactly instill confidence in the GSEs (Government Sponsored Enterprises). Their stocks are down, way down, and people are staring to wonder what will happen if they fail?

Unfortunately there’s no good answer, all we seem to know is that it would be really, really, really bad if the government was forced to step in and bail out the GSEs, but it would probably be worse if they just let them fail.

From Fortune:

“If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”

In case you’re wondering what Freddie and Frannie do — Fortune explains: they “help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn’t function, the result would be chaos.”

Meanwhile,Treasury Secretary Hank Paulson maintains that Freddie and Frannie are going to be fine:

“Fannie Mae and Freddie Mac are also working through this challenging period,” Paulson said. “Their regulator has made clear that they are adequately capitalized.”

As of this post, Freddie and Frannie have lost about 43 percent and 25 percent of their value (respectively) since Monday.

Fannie and Freddie Stocks Continue Their Slide [Washington Post]
Lehman Shares Sink as Fannie, Freddie Plunge Further [Bloomberg]
The Fannie and Freddie doomsday scenario [Fortune](Thanks, Chris!)

Comments

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  1. blue_duck says:

    That’s great to hear! *sarcasm*

  2. woodenturkey says:

    oh boy our very own Great Depression

  3. MayorBee says:

    Nice graphic. I like the monsters at the end there. Who are they supposed to represent, foreign investors that buy up debt at bargain basement prices? Also, the first paragraph has “Fannie Mac” instead of “Fannie Mae”.

  4. AdvocatesDevil says:

    43 percent and 25 percent since MONDAY??? Um, that’s a bad thing, right? Looks like another government bailout is on the way. Wish they’d bailout MY college loans!

  5. blue_duck says:

    @MayorBee: I was keeping to my own, but wondering what Fannie Mac was…

  6. incognit000 says:

    Another triumph of personal enterprise!

    Weren’t these things specifically founded to specifically stop or prevent this problem?

    As much as the government bails the industry out these days, I have to wonder why we don’t just let the government and it’s oligarchs control everything, while us taxpayers just keep the bad investments afloat. That worked great for the Soviets, right?

  7. mac-phisto says:

    personally, i’m excited. i love beans on a campfire!

  8. scoosdad says:

    Fannie Mae and Freddie Mac are also working through this challenging period,” Paulson said. “Their regulator has made clear that they are adequately capitalized.

    Reminds me of what Captain Smith said about his engineers assuring him that the watertight compartments would be adequate to keep the Titanic afloat….

  9. anibundel says:

    @woodenturkey: Maybe if we have our own great depression, McCain’s advisers will stop calling us whiners.

  10. Manok says:

    Thanks boomers!

  11. blue_duck says:

    @anibundel: I don’t think that would work. Even if we were to have one, they’d just deny it and call us whiners more than ever.

  12. VViley says:

    props to SkiFree illustrations

  13. Snarkysnake says:

    For investors,this is getting downright scary.It was always assumed by mortgage investors that Fannie and Freddie ,being governmnet sponsored,would be backstopped by the U.S. Treasury if things went boom. (Of course,no one EVER saw an implosion of this magnitude). I’m pretty sure that there is no explicit piece of paper somewhere that obligates Uncle Sam to make investors whole.That’s what makes their structure (not really government/not really private)so prone to misuse. That means that we may be facing a monster bailout of these twin demons.There is going to be lots of confusion about who owes whom.

    Why don’t you dumb assholes just pay your fucking mortgages and not stick us with the bill ? Be a damn site easier…

  14. Mr_D says:

    @MayorBee: I hate that I know this, but that’s the monster from SkiFree, a game that came (?) with Windows. After finishing the course, the monster would chase you down and eat you.

  15. DashTheHand says:

    That monster was such a cheater in the game. Now I know why, cuz he eats all the monies.

  16. buckfutt says:

    This shouldn’t surprise anybody. Fannie Mae and Freddie Mac have been festering cesspools of corruption for decades now. The government class (both parties) has used it as a slush fund to buy votes and pay themselves off, and now, surprise, surprise, surprise, we’ll all get the bill for it.

  17. People need to understand just how big a liability Fannie and Freddie are.

    From today’s WSJ editorial-
    [online.wsj.com]

    What Americans need to know is how damaging such a failure would be. This wouldn’t merely be a matter of the Federal Reserve guaranteeing $29 billion in dodgy mortgage paper, a la Bear Stearns. Fannie and Freddie are among the largest financial companies in the world. Their liabilities – mortgage-backed securities (MBSs) and other debt – add up to some $5 trillion.

    To put that in perspective, consider that total U.S. federal debt is about $9.5 trillion, compared to a total U.S. GDP of $14 trillion. About $5.3 trillion of that debt is held by the public (in the form of Treasury bonds and the like), while $4.2 trillion is intragovernment debt such as Social Security IOUs. This is the liability side of America’s federal balance sheet, and its condition influences how much the government can borrow and at what rates.

    The liabilities of Fan and Fred are currently not on this U.S. balance sheet. But one danger is a run on the debt of either company, putting pressure on the Treasury and Federal Reserve to publicly guarantee that debt to prevent a systemic financial collapse. In an instant, what has long been an implicit taxpayer guarantee for both companies would be made explicit – committing American taxpayers to honoring as much as $5 trillion in new liabilities. U.S. debt held by the public would more than double, and the national balance sheet would look very ugly.

    That’s “trillion” with a “T”. Even the WSJ is suggesting an injection of capital to hlep them weather the current market storm. We taxpayers cannot afford to bail them out.

  18. tedyc03 says:

    I did a thesis on this years ago. I saw it coming. These companies will need a bailout to survive.

  19. Wormfather is Wormfather says:

    One Word: BUY!

    Especially with a new administration comming in, one of the first things they will do is solidify two of the most important government backed securities in the WORLD!

  20. Nofsdad says:

    Isn’t Paulson that guy who’s still afraid to tell Dubya there’s a damned recession going on out here in the real world?

  21. picardia says:

    That whirlwind relocation to Buenos Aires I always dreamed of is beginning to look less like “madcap fantasy” and more like “viable economic plan.”

  22. Wormfather is Wormfather says:

    …OK, maybe not in the world but still.

  23. Keter says:

    Ok, the heretic must speak:

    If we stop letting people gamble with our economy (that’s the whole idea behind any financial transaction that is NOT directly based on the idea of exchanging money for direct acquisition of goods or services), the monkey business will stop. Put us back on the gold standard. Outlaw insurance. Require banks to be locally owned by identifiable people, not corporations. Leave credit unions alone; they’re all that is still working in this corrupt system.

  24. Orv says:

    Really, who didn’t see this coming when the rules were changed to allow those two to start taking on subprime borrowers? The idea was to prop up the housing market, but now it’s pulling down the financial sector instead. This is going to require a bailout that will make the S&L crisis look like nothing.

  25. fearuncertaintydoubt says:

    Fannie May and Freddie Mac are among those institutions that are “too big to fail,” meaning, of course, that the government is obligated to bail them out (at taxpayers’ expense with the requisite amount of fraud and graft attached). I humbly suggest that it is in the interest of our nation that we don’t allow anyone to get too big to fail. First, it’s as much socialist as paying “welfare queens” or whatever the boogeyman of personal entitlement is these days. Second, this kind of thing is built into the risk management of the company, i.e., too big to fail means too big *to be allowed* to fail, so it’s like being insured by the US population against your own stupidity and mismanagement. So there’s less incentive to be responsible. Third, it creates a financial monoculture in which a single failure can destabilize the entire economy.

    Part of me says, let them fail if they will. I don’t hear all the free market people clamoring to let the market decide if FNM and FRE are viable. Maybe they should. And after we dig out of that one, our government will realize that letting the JP Morgan Stanleys of the world become so huge that they can imperil the entire system is wrong and risky, they will change the system.

    If the entire world ate one and only one species of grain, what would happen if that grain was wiped out by disease? If there was only one source for fresh water, what would happen if it became contaminated? Monoculture is a very dangerous way to exist. A single event can unleash a global catastrophe. But our government is allowing a headlong rush into financial monoculture. Soon, there might only be one major bank. What then?

  26. I think it’s a good strategy to take everything Paulson says and believe the exact opposite. Phony and Fraudie Mac are doomed.

  27. chuckv says:

    href=”#c6611431″>fearuncertaintydoubt: If we let companies that are “too big to fail” fail, then other large companies will take risk management safeguards against failure. Keep in mind that being backed by government funds allowed Fannie May and Freddie Mac to get so large. If a company is insolvant, regardless of size, it should be allowed to fail so that companies that can actually do their job can expand.

  28. ShortBus says:

    I’m considering buying a Fannie Mae-owned, foreclosed house. Does this news have any affect on that? Can I count on them being even more eager to sell?

  29. differcult says:

    Who cares…with the way congress is running (9% approval now) and the way bush is acting, it really seems like nothing is wrong. Lets keep up with sub-prime loans, $150 oil and put a big smile on our face.

  30. Snarkysnake says:

    @ShortBus:

    Not really. A “failure” of either of these would mean lots of pain for their owners and bond investors (indeed,their stock might become worthless while the government stands behind principal and interest on their bonds),but for people doing routine business with these agencies like foreclosure sales,there probably won’t be a major disruption. Lotsa Luck !

  31. civicmon says:

    I’m not concerned. The Gov’t WILL step in to firm them up if there is indeed a capital crisis.

  32. itmustbeken says:

    I prefer to keep my mind focused on important things like the Christie Brinkley divorce trial.

  33. Tmoney02 says:

    @Keter: Hey forget the gold standard lets get really old school – Lets move back to the barter system! No way that could fail!

    In all seriousness I think you need to take some econ courses to learn why the stock market, insurance, and everything else you mentioned is actually a good thing in the whole.

  34. ShortBus says:

    @Snarkysnake: Thanks for the info!

  35. chuckv says:

    @Tmoney02: And why the aforementioned institutions would be even stronger should they exist in an economy with a sound and backed monetary system: i.e. the gold standard. Fiat currency would work if the amount of money in circulation were kept stable and the federal reserve didn’t try to manipulate the money supply. The Fed/Feds decrease the value of each dollar every time they put more money into circulation.

  36. Orv says:

    @differcult: I’m not sure the approval rating for Congress as a whole means anything. We don’t vote for or against “Congress” as a group. Most people like their own representatives; it’s just those other bastards they can’t stand. Hence incumbents almost always get reelected, even though Congress as a whole is universally detested.

    @chuckv: The contrarian view would be that the Fed’s manipulation of the money supply has done a lot to dampen the vicious boom/bust cycles we had in the early 20th century. The gold standard also puts the value of your currency at the mercy of guys with shovels, unless you can corner the market on gold. There also simply isn’t enough gold in the world to represent all of the economic activity that now goes on, unless the price of gold were raised to unreasonable levels.

  37. Matt says:

    Great little SkiFree monsters. Now when the global economy is collapsing and I am rummaging through my neighbors garbage for food scraps I will imagine the monsters dancing around the bonfire that is America.

  38. malvones says:

    well, ok, but how does all of this affect me? (sarcasm)

  39. @anibundel: @blue_duck: And when we don’t have a depression, but instead overcome this problem like we managed to overcome the S&L crisis, 70s stagflation, the 90s tech bubble burst, etc., you’ll admit that you were completely full of shit? Or will you just find something else to whine about?

  40. Hockeypuck says:

    Oh man, consumerist. Greatest. Graphic. Ever.

    I used to love that game…

    [ski.ihoc.net]

  41. yaowapa says:

    skifree!! I used to play that game a lot when I was little but I was always so terrified when the monster would come eat me

  42. DanaM says:

    I can’t speak for Fannie, but I know (firsthand) that Freddie Mac is quietly laying people off. I say quietly, because it doesn’t seem to have made the news like we frequently hear about other companies. The rumors were 500 people this year…we shall see.

  43. Caslonbold says:

    If you were smart enough to sign your name to a mortgage then it was also your obligation and responsibility to to read what you were signing and now to PAY WHAT YOU COMMITTED TO. If you could not afford these houses why did you buy them???

    MAN UP, OWN UP TO YOUR RESPONSIBILITIES AND DEBTS AND PAY YOUR MORTGAGES PEOPLE!!!!

  44. klahnako says:

    For those people screaming “PAY YOUR MORTGAGES PEOPLE”, I have two comments:

    1) It is not my fault there was a bubble when I bought, and now it burst. Are you saying the media was lying, when they told me the market will go up, and up, and up some more? Were those financial experts on TV not actually experts, or were they liars? If the media are liars and lazy, it is not my fault.

    2) The institutions offering loans have a responsibility to manage risk. They had the money to do their own market analysis, independent of the corrupt media, and determine the proper amount of contingency for the given market outlook. They should have foreseen, and planned for, my possible default (especially in a climate of falling house prices). If the bank was too lazy or corrupt to perform due diligence, it is not my fault.

    Who’s fault is it? It is the fault of whoever allowed the agents of a corporation to enrich themselves while the risk is assumed by the corporate entity; the latter of which disappears, leaving nothing but debt. This would be fine if the company can be replaced, but an essential company like utilities and banking require regulation to prevent inordinate risk, or require liability to be taken on by the agents it is made of. Since regulations were removed, and personal liability is non existent, we are screwed.

    I say tax the CEOs, presidents, traders and speculators the made up these failing banks to recover the money.

  45. SAGoon987 says:

    @klahnako: At least you’re honest about passing the buck? I thought the idea of “the Consumerist” was a person who researched all the angles and made decisions for him or herself, all the while outing bad companies… kinda like a OK! or People magazine, but you know, for business.

  46. MightyCow says:

    Just because you didn’t make a good investment doesn’t mean you don’t have to pay back the money you borrowed.

    Nobody told the people owning financial stocks that half the people in America would decide that it’s OK to default on their loans because the can’t flip their house for 100% profit every six months.

    Who is going to bail out the honest investors who are losing their shirts and don’t have the option of just ignoring their obligations?

  47. veronykah says:

    @klahnako: Wow are you serious? Really?
    By your logic I can say, I was SO young when I took out my school loans and they LET me take out a ridiculous amount of money with ABSOLUTELY no guarantee that I would ever make enough to pay them back so I shouldn’t have to?
    Cool! I’m all for it.
    F U Citibank!

  48. ian937262 says:

    @klahnako:
    I’m all for getting at the man, but you should incorporate ideas like this into what type of house you’re going to buy. It’s not the banks responsibility, just bad business practice for them to be giving loans out like candy.

  49. tricky69 says:

    And they wanted to put Social Security into the market?!?

  50. mac-phisto says:

    @ian937262: actually, it is the bank’s responsibility, considering you’re spending their money & all. the official term is “due diligence” & in the case of making bad loans, the bank is guilty of misfeasance.

    but it gets deeper. the fund managers that decided to put your money in these investment vehicles were also supposed to do “due diligence” to ensure that the risk was adequate. unfortunately, they were too busy cashing their load checks (which, ironically, they used to buy houses they couldn’t afford).

    meanwhile, the regulators were sitting on their thumbs (probably b/c they couldn’t do much more since congress & the bureaucrats tied their hands behind their backs long ago).

    my point is, we can point fingers all we want – there’s plenty of people at fault here – but that doesn’t change the fact that the boat’s sinking & we’re all on it. so, your choice – point or bail. personally, i don’t care. i’m an excellent swimmer. =)

  51. Trai_Dep says:

    It’s human nature to be optimistic and want more that a sober third party would accede to. It’s a bank’s JOB to say no when the applicant doesn’t make the cut.
    It’s how it’s been since the Romans first minted coin.
    While a sliver of responsibility is owned by borrowers, the bulk of responsibility is on the shoulders of banks, mortgage companies and Wall Street. Retroactively seize their bonuses given in the past seven years before we even broach the subject of bail-outs.

  52. bubbius says:

    When talking about yourself (hopefully hypothetically) and defaulting on your loans, you should accept responsibility for either getting yourself in a situation where that is unavoidable or being such an ass as to deliberately not pay despite the fact that you can. In other words, you should accept your lack of integrity and creditworthiness if you *choose* to default on a loan.

    The banks really shouldn’t be faulted for an individual case, only their broader failures with lending standards, i.e. some will always fall through the cracks. It shows that their models were fundamentally flawed and/or manipulated to inflate short-term profits for the bankers who depend on those numbers for their annual bonuses and such.

  53. darkryd says:

    Anyone else think we should go back to the gold standard?

  54. malvones says:

    I don’t understand why people who signed off on ridiculous adjustable arm loans are suddenly expunged from responsibility, they are part of the whole, the entire mechanism of greed. On the corporate side, willing to base securities on beyond-high-risk loans, and on the individual side, wanting to squeeze every drop of equity from a property. Then there are the individuals who simply bought a home they could not truly afford, and then there are some victims who fell to predatory lending practices. But if we simply let it all rest as the poor consumers that didn’t know what they were doing in the first place, well, then we are too stupid of a country to continue.

  55. Balentius says:

    @scoosdad: And, what the people at Bear Sterns were saying the week before they crashed…

    Personally, I think that when there is a taxpayer bail-out of a corporation, one of the first things that should happen is an immediate audit by the GAO, with FULL disclosure of where the money went. Most people won’t care, but it should be publicized what went wrong, and very specifically if there were bad/illegal decisions by upper management. If I was looking for a new CEO, it would be really nice to be able to see that this candidate was the one that bought a fleet of jets for each of his VP’s, or something silly like that.

  56. sirellyn says:

    @Snarkysnake:
    (Of course,no one EVER saw an implosion of this magnitude)

    Thats not true at all. A number of people have warned of this for a long time and continue to try to talk to people. And despite their excellent credentials, they get very little media coverage.

    Peter Schiff – CEO of Europacific Capital
    He’s been on almost all the networks talking about this for a while;

    Marc Faber

    Jim Rogers

    John Williams

    Jim Sinclair

    James Turk

    And yes of course Ron Paul. Say what you will about his politics, the guy knows money very well and has proven it time again.

    So yes, a lot of people have predicted this would happen. In fact they predict a lot worse. The sad thing is that while people call them “doom and gloomers” the worst you can do by listening to them is have a bedrock of safe growing invested money. Thats if everything turns out shiny and perfect. Thats the WORST that can happen listening to them. So I really don’t understand why more people aren’t.

  57. mac-phisto says:

    @che_leo: i don’t expunge borrowers completely, but i lay the majority of the blame on the business side for many reasons, mostly b/c back in the day, banks/brokers used to have this stamp that said “DENIED” on it & it used to be their favorite desk accessory. sometimes, they would even stamp applications DENIED just to make sure they weren’t in need of ink. but sometime in the late 90′s, they seem to have misplaced that (or replaced it with a 2nd “APPROVED” stamp – i dunno).

    i’ve worked for places that loosened their underwriting standards from should this person be approved? to how do we get this person approved? – the aftermath is never pretty.

    but the worst part about all of this? in most cases, this trend could be halted or even reversed if those crooks in washington gave servicers the right to negotiate modifications of the loans on behalf of investors. borrowers want/need it & investors want/need it, but i’ve yet to see legislation that mandates it (the closest i’ve seen in durbin’s “helping families save their homes in bankruptcy act”, but that’s not enough & it hasn’t moved anywhere since october).

  58. AlphaWolf says:

    sirellyn: great videos! Thanks for posting.

  59. the_wiggle says:

    @klahnako: 10K thank yous for saying it. the petty minding self righteousness of the pay ur bills extremists is beyond annoying.

    rather glad we’re waiting 2-3 yrs before buying a house. feeling rather better about renting given all the bruhaha.