Foreclosure Updates On Fannie Mae, Freddie Mac, & Indy Mac

During the past week we’ve heard a ton about Fannie Mae, Freddie Mac and Indy Mac.

Another crisis? Don’t we already have the Iraq War, a resurgent Taliban in Afghanistan, crazy fuel prices, our pals in Venezuela, Russia and Iran thumbing their noses at us, the credit crunch, housing crisis and, don’t forget, global warming?

Do we really need another crisis? How could newspapers be losing so much money with so much terrible stuff going on?

And that’s my point . . .there’s been a tendency for many people to stick their heads in the sand. It just seems too much to absorb.

At first, it’s easy to think that this is part of the endless downward spiral of the housing crisis.

Then I looked at the numbers.

Both of these institutions finance half of the mortgages in the U.S.

Together they owe five trillion dollars.

I can’t even comprehend that . . . isn’t that more than our national debt?

The good news is this money hasn’t been lost, yet. With some digging, I learned that under accounting rules Freddie and Fannie have to anticipate a possible level of loss, and then they have to create reserves to cover the loss.

Trouble is, no one can be sure where the housing market is going to go. Some say it’s down and out for a decade, others say for just a few years.

Also, Fannie and Freddie generally buy good stuff. They have high standards for the mortgages they buy and they don’t hold everything they buy; often they will package, insure and sell mortgages to other investors.

In short, as long as homeowners keep paying Freddie and Fannie, then we’re okay. After all, everyone needs a place to live, right?

What got my attention and everyone else’s is the government’s reaction. Of late, these guys haven’t been known to move quick, especially on the domestic front. Suddenly they are talking about emergency federal aid to prop up two companies that are privately owned . . . and that have five trillion in debt?

Again, nothing’s been lost, but the government is getting ready to mount it’s white horse and ride to the rescue.

I think I’m worried. So I began asking myself some questions.

What exactly is Freddie and Fannie? Why are they important? Why should any of us care?

For the past few years I’ve been aware that Fannie and Freddie were having trouble, but one morning I got up and things were different. I looked at the headlines and I nearly dropped my spoon in my cereal.

I always thought that they were too large to fail . . .

I remember hearing in early July when Treasury Secretary Paulson said everything was okay, that these guys were “adequately capitalized.”

Then last week Fannie and Freddie’s stock prices dropped like a melting iceberg in the North Pole. So what’s going on?

Fannie Mae was founded in 1938 as a quasi-government entity designed to facilitate government lending. They did their job well. Mostly.

Today the basic idea is this: with five trillion owed, and questions about Fannie and Freddie folding, we are looking at something that makes Bear Stearns seem silly. Default on five trillion, and you’ve got banks in the U.S shutting down and financial institutions from here to China on the brink.

Tuesday morning I saw a story where there was a line two or three people thick stretching around the corner in front of an Indy Mac Bank Branch. Dour faced people in shorts stood waiting for the bank to open so that they could get their money out. Just like those old black and white photos of the Great Depression.

We’re not there yet, but with housing values plummeting 5-10 percent each month, almost everyone who took out a mortgage the past couple years is underwater . . . depending on your market (we all can’t be San Francisco).

And just as with Bear Stearns, I immediately thought about us, the taxpayer, and what it might cost us and our country. Fannie and Freddie are privately held companies that get all sorts of perks . . .apparently, one of them a federal bailout, should they need it.

Don’t know about you, but five trillion is a lot of money to help a company we don’t own.

But we’re stuck. The banks upon which we depend can’t sustain such loses . . . so something has to be done. And despite the endless recruiting about a free market, the market we have can’t correct a five trillion dollar deficit. Anyone want to take a chance?

This being an election year, there is no issue, save this one, where both parties can come to an agreement. Why? Simple . . . everyone is at fault . . . especially those who worship deregulation as being the answer for everything.

Let’s take a look at what happened.

First, time after time Congress refused to empower the regulator overseeing Freddie and Fannie to keep something like this from happening.

Second, regulators allowed abuses to take place, which meant bad mortgages in Freddie and Fannie.

Third, Freddie and Fannie literally steamrolled anyone in Congress who attempted to do anything to keep these guys in check. They effectively used lobbyist as attack dogs and they took no prisoners.

Now why would Freddie Mac and Fannie Mae be so concerned about protecting their turf? You guessed it . . .money . . . for shareholders and executives.

Because these organizations had implicit government backing, they were able to get some great benefits, like cheap money because they were seen as a safe investment. This resulted in great profits . . . again going to shareholders and executives.

But something’s rotten in Denmark when in GOOD TIMES we privatize profits so that shareholders and execs can make MILLIONS, and in BAD TIMES, we suddenly socialize losses . . . so that the burden can be placed on the average people.

Anyone remember the S&L Crisis of the late 1980s?

Why can’t we seem to remember why things are regulated to begin with?

In the 1980s, the federal government bailed out Chrysler, but they bought into the company. If the taxpayer were going to help out the fat cats at Chrysler, then the government may just as well reap some reward years later.

The same is being offered for Freddie and Fannie, but Uncle Sam better get something back. Setting expectations to keep Chrysler accountable in the future was a big part of the bailout in the 80s . . . and it should be the same for Freddie and Fannie.

Treasure Secretary Paulson wants to raise the limit on the amount of debt that the government will cover, and wants to make an investment, buy some shares, so that the government can benefit down the road –– as well as provide an infusion of cash (so this really isn’t a bailout, is it?).

If this works, then the taxpayer might be off the hook . . . which I am all for.

In this scenario it’s more of a long term government investment than a bailout. Buy low and hold on for the long term. That actually makes sense. That’s what normal average investors do. Is our government actually learning some basic, sound principles of investing? Almost sounds like they are making a good decision which perplexes me. So here’s the kicker…..

I’ve read that some politicians want to buy Freddie and Fannie . . . but there’s one huge issue: How do we know what we’re buying? We don’t really know what mortgages these two companies really have, and therefore, we don’t know their exposure.

In short, the federal government can’t buy the companies because they don’t know what they are buying.

Whatever happens, we are in for an interesting ride.