WASHINGTON - Shares in Fannie Mae and Freddie Mac gyrated last week after the government proposed measures that would transform the traditional implicit guarantee of the two mortgage giants into an explicit one.
The proposals came as the two secondary mortgage giants are preparing to report additional multi-billion dollar losses for the second quarter–on top of more than $11 billion of red ink reported over the last year–amidst the cratering of the nation’s housing markets.
The proposals – which many were labeling a bailout – will give Fannie and Freddie access to the Federal Reserve’s discount window for low-interest loans immediately, and would–if approved by Congress–expand their guaranteed lines of credit with the U.S. Treasury from the current $2.5 billion each to as much as $300 billion, as well as authorize the government to buy stock in the companies in a crisis.
Good News/Bad News
The proposals were good news for credit unions and other institutional investors in the debt of the two mortgage giants, but bad news for stockholders, who saw the share prices in Fannie and Freddie sink to new lows last week.
The buzz after the government announcement was that a guarantee of the two secondary mortgage market giants is no longer implied, but now a given, changing the dynamics of the huge mortgage-backed securities market permanently. “Instead of it being an urban legend, we now know it’s true,” said Steve Brewer, CFO for Michigan Schools & Government CU.
The government actions, according to Christopher Sullivan, United Nations FCU CFO, amount to an effective 100% federal guarantee on Fannie Mae and Freddie Mac debt. With establishment of more definitive government backing, spreads between agency securities can be expected to narrow, according to Brewer. And that is what happened last week.
But the news did little to calm investors in Fannie and Freddie shares, which each plunged around 30% the day after the announcement. The shares, like many in the financial services arena, have been pounded in recent weeks by short sellers who have been betting on a fall of the stock. The short-selling prompted an emergency move by the Securities and Exchange Commission to ban so-called naked short selling, the selling of shares at a lower price without owning the stock. Short-selling has been attributed to the driving down of the stock of Bear Stearns, which led to a forced fire sale of the venerable investment house, as well as the recent plunge in Lehman Brothers shares. The SEC said it has issued subpoenas to 50 firms and hedge funds as part of an investigation into recent short sales. The day after the SEC announced the ban, which is not scheduled to go into affect until this week, shares in Fannie and Freddie rebounded, regaining 30% of losses, but still holding near all time lows.
Critical Partners
The two companies are critical to CUs because they buy as much as half of all CU residential mortgages and because CUs hold as much as $75 billion of securities issued by one of the two.
Congressional leaders were debating last week whether to attach the new Fannie and Freddie measures to a pending housing rescue package, or to debate them thoroughly before passing them. “They’re still trying to figure out the best way to proceed; whether to make them part of the broader housing package or consider them separately,” said Brad Thaler, senior lobbyist for NAFCU.
A group of conservative lawmakers who oppose government intervention in the markets, was calling for hearings and a comprehensive debate on the proposals.
Meantime, a broader debate was breaking out over a more comprehensive rescue. Some observers were suggesting that the government merge Fannie and Freddie, creating one giant secondary mortgage market provider.
Others were suggesting breaking up the two companies and assigning their assets to one of the 12 Federal Home Loan Banks. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com
