January 28, 2008: Hot damn. The government is going to stimulate the economy. Not with a lap dance or lubricated love glove, but with taxpayer dollars. Come summer, Mister and Miz America will get a rebate from Uncle Sam. What a man! Some people will get more than a thou of their own money back. Consumers will rush out and pump the economy. Wal-Mart here we come. Simultaneously, just like in romance novels.
Meanwhile, back at Rancho Notorious for Tax and Spend, pols will do it the usual way. On top, with the lights out.
Suddenly, next Summer...
Americans feel soiled and empty after trysting with Wal-Mart. Thanks to Helicopter Ben's interest rate cuts/puts, the heat was fleeting. (Folks with saving accounts never defrosted.) “Is that all there is?” asks the collective Peggy Lee, “A couple of plastic lawn chairs and a bag of groceries?” Wal-Mart winks and promises more trash for more cash. While Starbucks says coffee is for closers.
Real estate! Will the stimulus pack bring sexy back? Rebates are the front load of the package; the spoonful of sugar that helps the medicine go down. The potential kicker, as agreed upon by President Bush and the House of Reps (the Senate still has to sign on) is the lifting of limits and loosening of standards governing Fannie Mae and Freddie Mac, the GSE mortgage giants.
GSE equals government-sponsored enterprise. GSEs are private companies, but enjoy considerable support and advantages from the federal government. In return, they perform certain public chores and are regulated differently than non-GSE mortgage meisters. The largest GSEs are Fannie Mae and Freddie Mac. Their original mission was to buy conforming (not subprime) mortgages from lenders, thereby enabling them to make more loans. Fan and Fred hold some mortgages and market others as mortgage-backed securities (MBS). The securities are GSE guaranteed. While Fan and Fred aren't pure government poodles, investors assume taxpayers will clean up after any mess they make, or do a bailout should they fail. The bailout assumption is fed by unclear policy re the level of support the GSEs would receive in a major crisis. The chance of meltdown is said to be slim. Until recently, so was the chance of a national housing crash. And until well into 2007, many financial pundits said subprime damage was contained.
Together, Fannie and Freddie back more than $4 trillion in mortgages. The question has often arisen as to whether their capital cushion is too thin to support such massive debt. At times, it's been difficult to measure their cushion, due to pervasive book juggling.
Before Wall Street screamed bloody murder at the opening of 2008, President Bush was resisting pressure to lift the financial limit on the mortgages Fannie Mae and Freddie Mac purchase and securitize. The Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs' wimpy watchdog, also objected to lifting the limit and continues to do so post stimulus agreement. The present GSE limit is $417,000. The stimulus would snap the cap to $625,500, and to $729,750 in extra pricey housing markets. Allowing Fannie and Freddie to purchase and securitize jumbo mortgages, the oversize loans MBS investors now shun as too risky.
The jumbo shun makes lenders, Realtors, developers, and the pols who represent inflated housing markets, sad. The cap snap makes them happy. A GSE guarantee could stimulate investor interest in jumbo! Hopefully, jumbo won't get too frisky and drop dead in the sack ala Nelson Rockefeller. Taxpayers would be flattened.
Speaking of being crushed, Fannie Mae and Freddie Mac are big buyers of mortgages cut by Countrywide Financial. They bought some 40% of Countrywide loans in 2006. The year mortgage lending went sub-cellar. Countrywide has been hit hard by lack of investor appetite for jumbo-- and by its own unhinged underwriting. Of late, the mega lender has been denying bankruptcy rumors while selling itself to Bank of America. Bankruptcy talk caused Fan and Fred shares to tumble. That happens a lot these days. As do massive write downs. The GSEs took it on the chin in the 3rd quarter of 2007. Freddie had a record loss of $2 billion, Fannie lost $1.4 billion. The 4th quarter is expected to follow through.
As investors abandoned subprime MBS in 2007, Fannie Mae and Freddie Mac mounted a rescue mission. Fannie funded over $66 billion in subprime mortgage loans in the first half of 2007. But Patricia Parsons, director of product development, said Fannie “would continue to step lightly into this business.”* According to Becky Froass, senior director in industry and state relations at Freddie Mac, the company's MBS portfolio held 15% subprime in 2006. Freddie hoped to buy $9 billion more in 2007.
Then there are the lawsuits and investigations. Just like the subprime and/or jumbo players who operated sans government mattress, Fannie and Freddie have acquired a saucy rep.
In January, the Ohio Public Employees Retirement System and state Attorney General Mark Dan filed a class action suit against Freddie Mac. The retirement fund lost $27.2 million in Freddie Mac MBS. Attorney General Dan alleges Freddie Mac hid the fact that the securities were backed by subprime. Saying the GSE “participated in one of the largest housing investment deceptions in modern U.S. economic times.”** In 2006, Freddie coughed up $410 million in a national class action suit headed by two Ohio pension funds. In that case, fudged financial statements were at issue. And OFHEO is seeking $215 million in damages from Fannie Mae, related to account manipulation at Fannie during the reign of former Chief Executive Officer Franklin Raines.
In November, 2007, the office of New York State Attorney General Andrew Cuomo issued subpoenas to Fannie and Freddie. Seeking, among other things, “Information about all of the mortgage loans Fannie Mae and Freddie Mac have purchased from any bank, including Washington Mutual, and the mortgage backed securities associated with those loans”. According to Cuomo, Washington Mutual, aka WaMu, colluded with First American Corporation and subsidiary, eAppraiseIT (one of the nations largest appraisal management companies) to inflate appraisal values on homes WaMu mortgaged. If so, the value of the mortgage backed securities based on those appraisals would also be false. In 2007 alone, WaMU provided Freddie Mac with $24.7 billion in potential MBS. Fannie Mae bought $7.8 billion.
President Bush and his fellow economic stimulators say the GSE cap will only be raised temporarily. All the bad buzz re Fannie and Freddie could be as false as the alleged false appraisals buoying WaMu MBS. And buying, securitizing, and guaranteeing jumbo mortgages when housing values are slip-sliding may be a wise financial strategy. But come Summer, when the rebate part of the stimulus package arrives, taxpayers might want to sink their windfall into a bottle of generic hooch and party as if it were Fat Tuesday. Because the GSE jack in the back could mean one long stint in Lentville.
Carola Von Hoffmannstahl-Solomonoff
*"Risky credit shunned by Wall Street," Neil J. Morse, Inman News, 09/28/08
**"Ohio vs. Freddie Mac: Mortgage lender hid big risks, suit alleges," James Nash, Columbus Dispatch, 01/23/08
Sources include but are not limited to:
"Fannie Risks Won't Rise With Bigger Loans, Mudd Says, Kathleen Hays and James Tyson," Bloomberg, 01/29/08
"Fannie and Freddie to the Rescue?," Dawn Kopecki, Business Week, 01/25/08
Statement of OFHEO Director James B. Lockhart on Conforming Loan Limit Increase, Office of Federal Housing Enterprise Oversight, 01/24/08
"Housing slump to continue: Fannie CEO," Marcy Gordon, Associated Press, 01/08/08
"No Rescue Here: Fannie Mae and Freddie Mac are in no position to bail out the housing market," Washington Post, 11/23/07
"On Wall Street: Subprime flames lick at Freddie," Saskia Scholtes, Financial Times, 11/23/07
"New York Attorney General Cuomo Sends Letters of Notice and Demand to Freddie Mac and Fannie Mae," Press Release, 11/06/08
"Fannie Mae Ex-Officers Sued by U.S.," Eric Dash, New York Times, 12/19/06
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