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  • July 10, 2008 03:52 PM EDT by Brian Sullivan

    The Need to Clarify Fannie & Freddie's Position

    The big story is the tanking stock of Fannie Mae (FNM) and Freddie Mac (FRE). These GSEs (government sponsored enterprises) are incredibly important to America's housing market because they either aid in the issuance of new mortgages by providing a credit-risk backstop, or being the primary securitizer of mortgages, creating the outlet for the debt to be sold to buyers around the world and thus providing liquidity and spreaking the risk around a multitude of buyers.

    The phrase that often arises around these names is the "r" word, 'risk.' And it is in the perceived risk of Fannie and Freddie that that market is finding confusion. The more reporting I do on this story, the more I realize that it's not clear if even the government understands the risk, or what Fannie and Freddie's role exactly is in the market.

    There seems to much Congressional support for these firms. Senator John McCain found concern over Fannie & Freddie so newsworthy that today he made a comment about their future in a question & answer session in MIchigan: "They will not fail. We cannot allow them to fail. They are vital to Americans' ability to own their own homes and we will do what's necessary to make sure that they continue that function."

    Many investors who defend Fannie & Freddie feel this same way. Despite being publicly traded companies their GSE status, defined by special tax benefits and being the creation of the government, has provided some with confidence that in the end, no matter what the problems, the Government (read: taxpayers) will ultimately ride to the rescue.

    Maybe the government, both Republicans and Democrats, need to revisit their own history with these firms.

    On April 13, 2005, then-Treasury Secretary John Snow discussed the history of these firms. In testimony to the House Financial Services Committee Snow noted that one of the primary goals of creating Fannie Mae and Freddie Mac was "...to provide supplementary assitance to the secondary market for home mortgages by providing a degree of liquidity for mortgage investments." He added that "from 1990 through 2003, Fannie Mae's mortgage investments increased from $114 billion to $902 billion." Freddie's portfolio grew even more in that time, from $22 billion in to $660 billion. That's roughly $1.5 trillion dollars.

    But that's peanuts. Fannie and Freddie now own or control about $6 trillion dollars worth of the mortgage market. Thats about 50% of all home loans outstanding.

    Does that sound like companies providing mere "supplemental" assistance to the mortgage market? It's tantamount to saying the U.S. Postal Service "helps" deliver letters in America.

    Now to the more troubling aspect, and the $6 trillion dollar market question. Are Fannie and Freddie "too big too fail," as many defenders of the companies and some in Congress have suggested? John McCain said as much today in Michigan when asked about these firm's troubles. "They will not fail. We cannot allow them to fail. They are vital to Americans' ability to own their own homes and we will do what's necessary to make sure that they continue that function."

    Maybe Senator McCain needs to listen to what the government itself has said in the recent past.

    In an October 16, 2003 testimony before the Senate Banking Committee, Treasury Secretary Snow said "...even though the obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank are not backed by the full faith and credit of the United States Government, market participants haev come to believ that some sort of implied guarantee exists."

    Not backed by the full faith and credit of the U.S. government.

    Fannie and Freddie's mortgage portfolios are so large, and the credit markets and banks so weak, that its impossible to envision a scenario where private industry and Wall Street would have the credit or the willingness to take on much of the trillions in paper. So the trillion dollar question then becomes: if private companies can't do it, and, as John Snow said five years ago, the debt is not guaranteed by the U.S. government, who would ride to Fannie and Freddie's rescue? It doesn't sound like they would be "too big to fail" if there isn't anyone wililng and able to provide aid.

    One caveat though. We give the Government the full right to change it's mind and its position on backing the debt. Why wouldn't it? Remember this is the same Government that just back four years ago (when Snow was giving these testimonies) which argued Fannie and Freddie may be too big and needed stricter controls, only to allow them last year to reverse that course and grow their portfolios.

    And let's also not forget that the "G" in GSE gives Fannie and Freddie one very crucial backstop of its own: the power to tax. While the drop in home prices may result in many homeowners feeling less house-rich than they had been in the boom, its only a paper loss until you sell. The very real pain is likely to come in the form of a taxpayer-funded trillion dollar bailout of the U.S. housing market.

    That is, if the Government can figure out exactly what the roles of Fannie and Freddie are.

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Dana Swan

Bernacke's specialty is the Great Depression and what the Fed did wrong to make it worse. That is why Greenspan picked him for his replacement (reasearch this yourself). He is monetizing (printing money with no taxes to back it up) all the cracks in our economy right now. This has never been done in the USA and against all the rules of economics....... The dollar cannot survive this on the world markets...

July 14, 2008 at 2:06 am

doug marcus

the time hand-wringing is over, put together a capitalization package on the bad stuff and move on.

July 13, 2008 at 11:37 am

chuck

Why then aren't these semi-goverment agencies full fledge agencies or seperate private sector mortgage banks? Afterall they're public traded companies.

July 11, 2008 at 3:53 pm

Dick Hogan

Agree with Bill's comment, why bail out the liars--add time to their bad mortgages so the occupant has a place to live while he finances his mistakes over a longer time. Most want to keep a roof over their head. If any of them think they deserve a free ride on bail out they will take it--that's hy we are in the mess in the first place. The effect is to partly allow what McCain says is needed, but make the bad transaction stay out of the honest folk's existing ok morgages. This is responsible finance not freebee time again. All the perpetraitors who done it should hold the bag they collectively bought, and keep their feet to the extended mortgage payyoff. Meanwhile stay at the job and seek low cost transportation to the job. Back to buy only what you have income to support-period! Food, Meds, Mortgage period!

July 11, 2008 at 3:17 pm

mark smith

Good work Brian, in the end the truth is the truth, all the spin in the special interest world wont hide it. Its too bad you werent around when the "first" and "last" name in business with his talking heads decided sub prime was no big deal. How wrong can an Expert be! pfft... welcome to today.

July 11, 2008 at 12:14 pm

Rick E.

Average credit score 692! U.S. credit score 0.000000000! Exactly! I say we bill the 32 million really, really smart people who voted against 'spend thrift' democratic candidates. There is no way one can 'spend' this amount of dollars. The 'right people' put it in their pockets! They are not spending it, they are taking it from all of us with the blessings of the 32 million really, really brilliant folks who voted for these really wonderful 'leaders'. Wake up America! Stop voting for 'leaders' that sell us out.

July 11, 2008 at 2:42 am

Bill

The government is not wanting to help the f's. All that is needed is to bail out the float loans into fixed and the f's would in the long run win by allowing home owners to maintain their properties and keep funds flowing into the F's. This would allow the F's to keep in business without government bailouts. With a foreclosure many homes are sold on pennies on the dollar. Then where is the flow of funds to the F's? This is not brain science stuff.

July 10, 2008 at 10:25 pm

Robert Canella

McCain is a raving lun...these guys all are..."can't let them fail" what should we do then? Allow more outright lies and deception? Keep the markets alive and thriving...continue to bail out banks? Save Wall Street!!! It is amazing to me that "we the people" got plenty of encouragement just last year from Paulson and Bernanke that "everything was fine with a capital F"...now we are seeing this was done when they knew full well that the capital F was a plan to F "us the people" while the bunch let their cronies on Wall Street off the hook...and the F "FRAUD" has continued by not insisting that banks represent their values with HONESTY...hiding this crap from the public with off balance sheet SIVs and other deceptive practices! This is going to end very badly...the billions the FED used to insure the markets only forced the issue more slowly...as Carl Denninger posted on his website the "Market-Ticker forum" "Its simple, really. Alchemy never did work and still doesn't. The entire premise is a lie - you can't get something for nothing. When reality comes and intrudes on your party, it usually ends up spelling "G.A.M.E. O.V.E.R." in bright flashing lights. There are no "write-ups" coming; this paper was crap at issue and still is; you can polish a turd or even attack it with a spray paint can but you still have a turd! If you stick it in a bun and take a bite it is still going to taste like s**t; you can't wave a wand and turn it into a hot dog no matter how hard you try!...you might spray paint a turd but it's still a turd..." http://market-ticker.denninger.net/archives/511-Fried-Fannie-Thursday.html Game over...now the only question is if "we the people" accept the new plan to thrust this turd onto us and our kids...We have already trusted them with massive cash injections and interest rate cuts...and got in return a failing dollar...$5 gasoline...massive inflation. Time is NOW to write your congressmen and women and say NO...no more F for us thanks... Businesses come and go...too big to fail is more crap...let's not end up the ones to eat it! Write your congressmen people tell them this crap is not part of the

July 10, 2008 at 7:05 pm

sbgtulsa

The US has the ability to bail out the GSE's. $50 billion would do it, assuming housing values don't drop beyond 10 to 15 percent beyond current levels. However, a 20 to 25 percent additional drop would probably result in a 100 billion dollar bailout. It is not a 6 trillion dollar problem. The cost of NOT bailing them out could be a financial collapse that threatens a 14 trillion dollar economy. 100 billion versus 14 trillion. Easy math. However, the dollar may not recover, because of existing inflationary pressures which will only be exacerbated by the issuing of more debt to cover the GSE bailout.

July 10, 2008 at 6:33 pm

Carola Von Hoffmannstahl-Solomonoff

Also consider that many of the taxpayers who'd be tapped would be potential homebuyers. Either first-time or trade-up. Think how their buying power would be impacted by having to bail out Fannie and Freddie. Still, there's a bright side-- this could bring no income subprime back!

July 10, 2008 at 5:44 pm

Bill

Why bail out bad lenders? Let them sink for lying to buyers about their best options-a deceitful crime. I forgot, our congress lets criminals go if they pay them a cut of the action. I have an idea. Put home owners on a fix rate and add a yr to their mortgages payments for the change over. Then the f dumbasses will get paid. A win win for both and it is the only thing that will work in the long run.

July 10, 2008 at 5:28 pm

Donald W.

Good luck to the Government on this one...no wonder GREEN(what's his name) retired...Poor, poor, Berk...he will get all the blame.

July 10, 2008 at 5:27 pm

mat

always found you an interesting and engaging commentator/interviewer brian. keep it up! you don't need to publish this!

July 10, 2008 at 5:16 pm

Justin

Financial Armageddon. The government is damned if they bail them out and damned if they don't. Their either bail these guys out or bail out the FDIC when their is a massive run on the banks. Either scenario could put the greenback out of commission for good. This is nuts man.

July 10, 2008 at 4:19 pm

about this blog

  • Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.

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