Market Watch

Fannie Mae / Freddie Mack - Smaller, Leaner, Scarier

Well, according to a recent Bloomberg article HERE it looks as if they now want to restructure and share some risk with private owners..

“Fannie Mae and Freddie Mac will create a common platform for issuing mortgage-backed securities as they wind down operations and plan for a future in which the two companies no longer exist, their regulator said yesterday…”

“Their new joint securitization company will have its own chief executive officer and chairman, and will be funded by Fannie Mae and Freddie Mac, DeMarco said yesterday. It will create a single standard for issuing securities that could survive independently if the two companies no longer exist, he said.

The two enterprises this year also will aim to execute $30 billion each in transactions in which they share the risk of backing single-family loans with private participants in the market. Those could involve mortgage insurance or include the issuance of different types of securities.

“What we’re looking for is to have some portion of the risk sold off to private owners and that way reduce the exposure of the taxpayer and demonstrate the viability of these types of transactions,” DeMarco said on the call.”

Although these two did not directly partake in the “lump sum” of private packaging of mortgage-backed securities via the wall street pain train , they did help facilitate the bubble by distorting the market. The intent is usually noble; help those struggling get a home. However, all free markets require risk/reward balance. Whenever credit scores and lending standards are lowered to where risk/reward is rendered useless or unlimited guarantee’s are issued, you will increase the likelihood of bubble formation and create a moral hazard in the system.  This is of course is not a right or left issue as GWB himself encouraged and enacted policies which pushed along-side Wall-street in helping form one of the biggest bubbles ever seen. No credit or no money down? No problem. Actually, there is a problem. Although noble in intent, many folks who should not have been handed loans for a new home were not able to handle their finances when the bubble burst. They were set up to fail. Credit scores and financial history are reviewed for a reason.

What do these institutions do ??? Fannie and Freddie were essentially a backstop to private lenders and provided liquidity to the system. They helped repackage and made guarantees so lenders could free capital and keep the system flowing. Although pounded by the left that Fannie and Freddie were not the cause of the crisis, they still fail to see how it contributes.

As noted HERE they still don’t see this to be an issue…

“Since mortgage lenders don’t have to hold these loans on their balance sheets, they have more capital available to make loans to other creditworthy borrowers. Lenders also have an added incentive to offer safe and sustainable products—namely long-term, fixed-rate mortgages—because they know Fannie and Freddie will likely purchase them. Since Fannie and Freddie guarantee payments in the event of a default—for a fee, of course—investors don’t have to worry about credit risk, which makes mortgages a particularly attractive investment.”

Again, I understand that private firms eventually worked their way around Fannie and Freddie and began packaging their own securities but that does not mean guaranteeing anything is a good either.  It is precisely the opposite concept that something can fail or is not guaranteed that help regulate the market. The fear of losing is what keeps the riskier investments at bay. Additionally, like any financial institution (Most especially Wall-Street) they should be allowed to fail. They did not keep enough capital at hand to be solvent and did not diversify their portfolio to handle a downturn in housing. They of course collapsed and guaranteed citizens fork over their money to the tune of 190 billion taxpayer dollars.

The best thing we could have done is let both wall street and institutions like these go the natural way of the market.