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!)
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.
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.
Anyone else think we should go back to the gold standard?
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.
@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.
@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.
@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).
sirellyn: great videos! Thanks for posting.
@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.