Hot Fanny, Semi-Freddie

Banking

Fannie Mae, Freddie Mac -

1) Fannie Mae - founded in 1938 as Federal National Mortgage Association; Freddie Mac - founded in 1970 as Federal Home Loan Mortgage Corporation,
2) same charters, Congressional mandates and regulatory structure (stockholder – owned corporations chartered by Congress to increase
the supply of funds that mortgage lenders can make available to homebuyers, multifamily investors through mortgage purchase, credit guarantee, portfolio investment activities.), different business strategies
3) combined debts of $1.5 trillion,
4) own or guarantee $5 trillion in mortgages, about half of nation's $12 trillion mortgage market = stability, liquidity to mortgage market (guarantee each mortgage against default by the homeowner); if stop buying loans, banks may stop making new loans, freeze United States housing market; if harder for them to borrow money, mortgage interest rates,
5) contracts with other institutions worth $2 trillion more to hedge the risks behind those mortgages,
6) $11 billion in losses in the last nine months,
7) Freddie Mac stock closed at $7.75, down more than 45% for the week ended 7/11/08. Fannie Mae closed at $10.25, down 30% for the week,
8) $2.25 billion line of credit at U. S. Treasure (for past 40 years) - now considered quite small compared with the overall obligations,
9) Friday (7/11/08) - Office of Thrift Supervision (OTS) closed IndyMac Bank F.S.B. (Pasadena, CA - one of the nation’s largest independent mortgage lenders, major issuer of subprime loans), Federal Deposit Insurance Corporation (FDIC) named Conservator; largest bank failure since the 1990-1991 recession (502 banks failed in three years).












(Sources: Fannie Mae; Office of Federal Housing Enterprise Oversight; Bloomberg)

- Fannie Mae's exposure to the housing market has soared;
- outstanding guaranteed mortgages tripled from 1998 to 2007 (top left);
- delinquency rate on Fannie Mae mortgages is rising (top right);
- increases the chance that the company will have to make good on its guarantees.
- stock price of Fannie Mae, Freddie Mac down more than 75% in one year (below)















July 13, 2008 - "Bush administration hastily arranged the dramatic Sunday evening rescue of Fannie Mae, Freddie Mac after Wall Street executives and foreign central bankers told Washington that any further erosion of confidence could have a cascading effect around the world, officials said on Monday....any more turmoil threatened to reduce the value of trillions of dollars of the companies’ debt and other obligations, which are held by thousands of domestic and foreign banks, pension funds, mutual funds and other investors... could have lasting effects on economies here and abroad already struggling from slumping housing markets, spiking energy prices and sharp declines in consumer confidence." (New York Times)

Rescue Plan:

1) Federal Reserve agreed to let the companies have access to its discount lending window,

2) Congress to give officials power to inject billions of dollars into beleaguered companies through investments and loans as part of a major package of housing legislation.