Fannie and Freddie: The Bulls in Bernanke's China Shop
Can someone please forward this to Bernanke? If not, I'll have to.
Psst, Zimbabwe Ben, you might want to check this out (via Money Morning):
At its most basic level, the U.S. Federal Reserve’s so-called “exit strategy” is designed to let government bailout and liquidity programs unwind on their own, as markets return to a state of “normalcy.”
But what investors don’t realize is that without an exit strategy that includes plans for unwinding insolvent mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) - now more accurately defined as government-sponsored hedge funds - recent market gains will be limited and will likely reverse. If those setbacks cause the nascent U.S. housing market rebound to stall, it could even lead to a decade-long downturn.
And Fed Chairman Ben Bernanke’s exit strategy ignores Fannie and Freddie.
Government-sponsored hedge funds, that's cute.
In last week’s "Semiannual Monetary Policy Report to the Congress" and in his July 21 Wall Street Journal Op-Ed piece, Bernanke, the U.S. central bank chairman, laid out plans to wind down government credit extension programs and combat any potential inflationary pressures. What was not addressed was how - or even if - the two government-owned and operated de-facto hedge funds, with combined assets of more than $6 trillion, would be unwound, or whether they would remain in place as they are in order to be used as back-door fiscal and monetary policy tools.So what we have here, essentially, is a government-sponsored parasite sucking at the lifeless carcass and a central bank who either refuses to acknowledge or directly discounts the massive 800 pound gorilla standing on the fiscal fire escape blocking the way out of this mess.
In what amounts to more than just a bailout on an unprecedented and under-reported scale, the takeover of both Fannie and Freddie provides the Fed and the U.S. Treasury Department a super sponge to both guarantee new mortgages and absorb all the unwanted mortgage-backed securities that banks and non-bank originators package and need to offload.
Because they lack sufficient capital - or lack the appetite to hold any new mortgage paper on their balance sheets - banks need this government-sponsored outlet for the mortgages they want to unload. The Fed and the Treasury Department are using their taxpayer-supported hedge funds to grease the rusted wheels of the mortgage money machine to gain traction where there is none.
So, ZB, whatcha gonna do about it?
Oh, and it gets worse. Taxpayers will likely never see their GSE infusions returned, nor should they expect Fannie and Freddie to suddenly learn to play by the rules. Why should they? One imagines that the Fed is actually promoting some of this behavior to keep up the illusion of a healing housing market.
Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.So not only are these two GSEs little more than mutated hedge fund black holes, they are also some kind of bizarre mortgage Ponzi scheme? Well no wonder they are government-sponsored.
"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."
The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.
Fannie and Freddie together own or guarantee $5.4 trillion in mortgages. When the housing market soured in 2007, mortgage defaults ate through the companies' thin cushions of capital, prompting fears they would collapse. The government seized them in September, putting them under the conservatorship of their regulator.
FHFA on Thursday unveiled several new regulations concerning the mortgage giants and the 12 Federal Home Loan Banks. The regulator also announced conclusions from three studies it was required to conduct by a 2008 housing law.
One of the studies found that Fannie and Freddie have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans.
As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.
Manipulation at its finest, people, from our friends at the Fed.