FANNIE AND FREDDIE, WHAT HAS BECOME OF YOU???

September 12, 2008 at 4:16 pm Leave a comment

– from one of our favorite mortgage voices, David Reed, CD Reed Mortgage Bankers, Austin

Fannie Mae and Freddie Mac, those two corporations that you and I bought over the weekend, were really an odd bird to begin with.  Fannie was formed in 1938, refurbished in 1968 then Freddie joined along for the ride in 1970.

What made them odd was that while they were profit-oriented corporations, they were sponsored by the Federal Government.  While there was no specific government guarantee of their success, the mere fact that these corporations were sponsored by the government implied the government would guarantee them should they ever get in trouble.

Safe investment, backed by the US government.  Nice work if you can get it.

The Bush administration, and others, have long called for the privatization of Fannie Mae and Freddie Mac and releasing the so-called “government sponsorship.” 
Why?

Fannie and Freddie were gambling with other people’s money.  If they were a “normal” corporation, without any government “backing” they would have been a tad more prudent with their bets.  What sort of bets?

Earlier this decade, investment bankers like Bear Stearns, Lehman and others, invented the “alternative” mortgage market.  Those were the pay option ARMs, “stated” loans and no down payment loans.

Subprime loans also began to make a big splash.  No one wanted to be left out of the housing market.

Fannie and Freddie suddenly began to lose loads of market share, so they decided they’d play the alternative and subprime game.

Fannie and Freddie got into a game they should have never gotten into.  Of course, this is all in hindsight.

While the amount of those alternative and subprime loans made up a very small amount of either’s portfolio it was enough to spook the markets.  Their stock values got pounded.  While they both had enough required reserves, investors lost confidence in them.

Both were recently given an opportunity to raise capital but with all the noise from the press and other pundits it’s kinda hard to raise money when everyone is talking smack about you.

The government moved in, which surprised me, but apparently there was no other choice.  The shoe had to drop one way or the other.

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Entry filed under: Smart Real Estate. Tags: , , .

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