‘Freddie (Mac) is a disaster’
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
Good morning. One of the more common hopes for a quasi-public bailout of the mortgage market is for Congress and the White House to pass legislation giving Fannie Mae and Freddie Mac -- the for-profit, government-sponsored buyers and guarantors of mortgages -- an even bigger role in the mortgage market. Let Freddie and Fannie buy more mortgages, and let them buy the big ones -- Jumbos -- is a common refrain.
Those hopes took a body blow* this morning when Freddie Mac shocked Wall Street, reporting a $2 billion loss and warning that ‘it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments.’
Fallout: Freddie shares fell 29% this morning; one analyst told CNBC’s Diana Olick, ‘Freddie is a disaster.’ Another analyst, Howard Shapiro, wrote, ‘... it will mean, in our opinion, a further exacerbation of the housing downturn — even less credit available and steeper downturns in home prices.’
Further fallout: Shares of Countrywide Financial -- which relies heavily on Freddie and Fannie to purchase its loans, and has been lobbying for an expanded role for Freddie and Fannie -- fell to new lows, dropping below $10 per share.
Commentary: It may still be premature to ask whether there is an implied government guarantee of Fannie and Freddie, but I believe it is a good question for presidential candidates: Investors believe the government will bail these companies out if they run into trouble: is that true?
*Updated Commentary: I wrote earlier today that hopes for a bigger role for Fannie and Freddie would likely be hurt by Freddie’s dismal performance. I’ve been listening to CNBC today and numerous commentators believe the opposite is true: that Freddie’s troubles will spur Congress to loosen regulations, perhaps freeing Freddie and Fannie to buy more mortgages, even though their performance at the moment is shaky.
Your thoughts? Comments? Email story tips to lalandblog@yahoo.com.