• Be 90+ days late on their payments
• Show affidavit of financial hardship
• Not have filed for bankruptcy
• Have taken out the mortgage before Jan 1, 2008

Fannie, Freddie Unveil Plan to Modify Loans [WSJ]

FBI probing bailout firms [CNNMoney]

Fannie, Freddie chiefs lose 'golden parachutes' [Washington Post] (Thanks to Matthew!) (Photo: Getty)

Here's how it went down:

• Treasury Secretary Henry Paulson told Fannie Mae CEO Daniel Mudd (whose name is good as...) and Freddie Mac CEO Richard Syron that they and their boards were fired.
• The companies will be placed into conservatorship of the Federal Housing Finance Agency.
• Common shareholders will be virtually wiped out. Preferred shareholders (banks) will be protected.
• Instead of providing a massive headline-grabbing infusion of cash upfront, the government will provide quarterly subsidies to cover losses.
• Freddie and Fannie will continue to operate normally, except taxpayers will be on the hook for future losses.

Both Obama and McCain announced that they support the plan, not that either of them can veto the Bush Administration's takeover.

The Treasury made its move now partly to reassure Mexico, Japan, and China that their central banks' shares of the Depression-era institutions will be backed by you.

Isn't that great?!

U.S. Rescue Seen at Hand for 2 Mortgage Giants [The New York Times]
U.S. Near Deal on Fannie, Freddie [The Wall Street Journal]
Fannie, Freddie's boards meet Saturday to mull government plan [Reuters]
PREVIOUSLY: U.S. Treasury Attempts To Save Freddie, Fannie, Avert Apocalypse
Bush Administration Considering A Takeover Of Freddie And Fanny
(Photo: Getty)

...expenses related to foreclosures and other credit losses increased to $5.3 billion from $3.2 billion in the previous quarter. And the company signaled that those losses would probably accelerate.

The loss “is a reflection of the extraordinary pressures at work in the housing and mortgage markets,” Fannie Mae’s chief financial officer, Stephen M. Swad, said in a statement. “The credit picture remains very difficult.”

“We estimate that average home prices declined by 6 percent on a national basis during the second quarter of 2008, which translates to an 8 percent total national decline since the beginning of the downturn in the second quarter of 2006."

Two days ago Freddie Mac, the second largest lender, told investors that it had experienced a loss that was 3 times what they were expecting.

Fannie Mae says they will stop offering Alt-A mortgages and cut operating costs by 10%.

A $2.3 Billion Loss for Fannie Mae [NYT]

The faxed scam says, "We are happy to info you that you have emerged a winner under the F&F EQUITY DRAW, which is part of a promotional draws organized by all crediting lending partners to enable home owners who owned a home all over the United States of America have more money, and at the same time buy more homes in the area where they live. The funds were drawn from part of the total Fifty Billion US Dollars ($50 Billion) release to the financial institutions and creditros by the Government and other donor nations who have so much interest and investments in the United States of America."

Here's the BBB's report on investigating the scam:

After faxing my official “Equity Draw” information sheet to a number in Idaho, I called the 778 number and had the pleasure of speaking to “Jorge Marcelo”, at Fannie n Freddie Prize Headquarters. He said he had my fax right there in front of him, which is interesting since I never told him who I was nor did he ask. But he did tell me that to collect my big prize I was required to wire a “processing fee” of $850 to the Vegas address in my documents via Western Union, call him with the WU control number and then I could collect my riches.

Obviously I’m excited, so I invited the FBI to share in my excitement. I’m not sure if there’s anything here worth law enforcement pursuit, but that’ll be up to them. My guess is Jorge is probably not in BC, and that the WU office in Vegas will forward my $850 to another location, and it may be bounced several times.

Fraudsters have a core set of scams that they just keep putting new hats on old scams to fit the zeitgeist. Most of us wouldn't fall for this iteration, rife with spelling and grammatical errors. But a few, like the desperate, elderly, ignorant, non-native-English-speaking, or some combination thereof, might. The scammers, will, however, try another variant on the lottery scam. For them, it's all a numbers game, and their auto-dialers just keep ringing up one more.

(Photo: ptaff)

Bush had originally threatened to veto the bill over the inclusion of $3.9 billion in "neighborhood grants" which he claimed would benefit the lenders who caused the mortgage meltdown, but relented as the credit crisis deepened.

Bloomberg says that the big losers in the bill may be Freddie and Fannie shareholders, who could lose their equity if the US Treasury uses its new authority to take over the GSEs.

Bush signs housing bill to provide mortgage relief [AP]
(AP Photo/Pablo Martinez Monsivais)

From the NYT:

An official said the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

The actions, which taken together could provide an overwhelming surge of capital to the companies, were the second time in four months that the housing crisis had prompted the government to scramble over a weekend to rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and cause a shock to the financial system.

Paulson, who has spent the last week assuring everyone that Freddie and Fannie are "adequately capitalized," had this to say:

“The president has asked me to work with Congress to act on this plan immediately,” the Treasury secretary, Henry M. Paulson Jr., said Sunday on the steps of the Treasury building. “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.”

Treasury Acts to Shore Up Fannie Mae and Freddie Mac [NYT]

Together, Freddie and Fanny own or guarantee more than half of the nation's mortgages — about $12 trillion, according to the NYT.

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

Treasury Secretary Paulson maintains that he is in favor of supporting the GSEs in their current form.

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement today in Washington. ``We are maintaining a dialogue with regulators and with the companies.''

As of this post, Freddie is trading at 5.85. Fannie is trading at 9.83. Both are down about 25%.

U.S. Weighs Takeover of Two Mortgage Giants [NYT]
(Photo: Jonathan Ernst/Reuters)

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!)

My adjustable rate mortgage with Verity Credit Union is due to reset next month. As part of the note there is an option to convert to a fixed rate. The calculation of this fixed rate is clearly defined as equal to Fannie Mae's required net yield for a 30 year fixed rate covered by an applicable 60-day mandatory delivery commitment plus five-eighths of one percentage point, rounded to the nearest five-eighths of one percentage point. So take the Fannie Mae 30 year 60 day rate add 5/8ths and round to the nearest eighth. The note said the note holder got to decide the day of the rate but Verity was nice enough to let me pick which day I wanted as long as I gave them 15 days notice before the reset date. I patiently watched the rates every day and fortunately right before I was to give them notice rates were steadily declining...

I called to verify everything but was given a conversion rate which was 1/8th higher than I expected. I quickly double checked my math and found no mistake. I started asking questions, like where did they get the Fannie Mae rate which was rounded up to the nearest 1/8th. The lady did not know where the rate came from just that her rate sheet said what it said. I then went above her to a supervisor and posed the question why was the rate being rounded up to the nearest 1/8th when the Fannie Mae rates are not rounded at all. She was puzzled as well and asked for the website that was publishing the daily rates I was seeing and told me she would look into this.

The next day I got a call telling me that they had redone their procedures/policies and from now on would be calculating their conversion rates how I was doing it. Oddly enough I was apparently the first person to ever question or notice this discrepancy. In the end we are only talking about $15 a month difference but the lesson here is to always do your research and only work with quality establishments.

The daily Fannie Mae rate can be found online here.

"We would expect that our total future credit losses on our current book of business would total approximately between $10 billion and $12 billion," Chief Executive Officer Richard Syron told an investors conference sponsored by Goldman Sachs.

"If I were you, I would want in this time period someone running one of these companies (Fannie Mae and Freddie Mac) to err on the side of pessimism rather than optimism," he said.

In other news, both Freddie and Fannie have decided to stop buying so many bad loans and are are changing their criteria for purchasing delinquent home loans, in order to reduce the number they buy from investors.

The companies customarily repurchased most mortgages once they were 120 days past due. Freddie Mac said it will now purchase delinquent loans that were part of larger securities issued by the firm when the mortgages are at least 120 days past due and either the mortgage has been modified, a foreclosure sale occurs, or the cost of payments to security holders exceeds the cost of holding the loans. It will also repurchase mortgages that are 24 months delinquent.

Fannie, Freddie Buying Fewer Bad Loans [NWITimes]
Freddie Mac expects $10-12 billion credit losses [Reuters]
(Photo:wwworks)

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Much of the blame for the fiduciary inaccuracies was laid on CFO J. Timothy Howard, and Leanne G. Spencer, former controller.

A schedule prepared by Ms. Spencer "set out different earnings projections based on different types of expense deferrals that described a plan, ultimately accepted by senior management, to defer nearly $200 million in expenses in order to meet earnings projections, and, as a consequence, meet the target for awarding the largest amount in executive bonuses," reported the New York Times.

Something to check out while boning up for Round 7 of the Worst Company Poll.

How does Fannie Mae make its money in the first place?

Pretty pictures after the jump...

"On the left, Fannie issues bonds on Wall Street and has to pay interest on that money. With the money they buy mortgages from banks and collect the interest on the mortgage. The difference between the two interest rates is Fannie's profit.

On the right, they guarantee mortgages. The fee they get by guaranteeing the mortgage (minus the cost of any defaults) is their profit." (Chart and explainer courtesy of L-dopa).

And yes, Fannie Mae is an actual person, lacking legs, seeing only through two slits. To see her disembodied form floating down Wall Street is a sight to send shivers down to your soles.

Report on Fannie Mae Cites Manipulation to Secure Bonuses [New York Times]