Feds take over both Fannie May and Freddie Mac to avoid their failures. Cost Unknown

[LanceOregon]

Apparently both were in serious danger of failing tomorrow ( Monday ) after the markets opened.

The US Government is thus taking over responsibility for over $5 Trillion Dollars in Home Mortgages with this action.

The scary thing is that no government spokesman today could even give an estimate of how much money this could end up costing the government. However, the affects that their failures could of had on the economy, and especially, the stock market, were so potentially dangerous, that the Bush administration felt that it had no other choice than for the government to seize control.

There seems to be no light at the end of the tunnel of this current economic downturn. I wonder how this will all play out politically in the Presidential Election, if the economy continues to slide downhill further these next two months??

How bad can the economy be, for the Feds to make one unprecedented move after the other, like they have done so far this year? Is the government not really publicly admitting how bad things really are? Will people blame the Republicans for the current economic situation?

Here are some news reports:

http://www.foxbusiness.com/story/markets/government-seied-fannie-mae-freddie-mac/

http://ap.google.com/article/ALeqM5gPfdSGL82ufTASVrfgCbKslcCYPgD93266BG0

http://latimesblogs.latimes.com/money_co/2008/09/is-it-a-bailout.html

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[fisherman66]

It's my understanding that the FMs valuation is somewhat based on the ABX Tranch (or similarly packaged bonds) value and the securities that have be converted from mortgages and bundled into this extremely devalued market. Default are record right now, but so in the kind of manipulation that caused gasoline to spike so suddenly. This kind of bail out is ugly. I'm guessing it will make the savings and loan bail out look like girl scout cookies.

 

[mtlucas0311]

I just read that the Treasury dept. is prepared to pay 100 Billion (with a B!) over time. I read another estimate that it would end up costing about 25 Billion. Guess we'll have to hold off invading North Korea.

 

[gc70]

Apparently both were in serious danger of failing tomorrow ( Monday ) after the markets opened.

At 6/30/2008, Freddie and Fannie reported combined quarterly losses of $3.1 billion, but held combined capital of $54.2 billion, so going broke tomorrow was not an issue. However, the credit rating agencies were probably going to downgrade their ratings in the immediate future and that could have led to a death spiral in the mortgage market - Freddie and Fannie reducing mortgage purchases, banks making fewer mortgages, fewer home sales, continued downward pressure on home prices, etc.

The damage has already been done by the years of excessive loans to people who really could not afford the houses they were buying and kept pushing up housing prices. We could pay for past excesses by allowing the housing market and home prices to crash. But it looks like we will pay for past excesses through government backing of Freddie and Fannie so they can borrow at favorable rates to continue to buy mortgages and keep the merry-go-round going. Anyone who bought a house in the last 5 years would probably prefer Plan B.

I just read that the Treasury dept. is prepared to pay 100 Billion (with a B!) over time.

$100 billion is only 2% of the $5 trillion of mortgages that Freddie and Fannie hold or guarantee.

 

[mountainclmbr]

Isn't this due to Democrats forcing the banking industry to make home mortgage loans to those in their base who could not qualify? I have been trying to find the quote from a Countrywide executive who made a speech saying something like "we need to change our mortgage evaluation process to approve not only those who we know will make the payments from their backgrounds to those who we can say, we believe they will make their payments too".

 

[nate45]

I remembered this article I read when it first came out

"It turns out that there is no magic way to put every American citizen, regardless of financial means or credit history, in a 3,000 sq ft home."

Freddie, Fannie, and Curses on FDR

More socialist, vote buying, pie in the sky, BS. That the productive and responsible in society end up footing the bill for.

 

[gc70]

Isn't this due to Democrats forcing the banking industry to make home mortgage loans to those in their base who could not qualify?

Democrats are friends of the people.

Charles Schumer, Senate website, 3/25/2007
Senator Introduces Plan to Ensure Federal Regulators Protect Borrowers and Take Charge of this Usurious Market

... These non-traditional mortgage products, which include hybrid adjustable-rate mortgages with intricate interest rate terms and conditions, have been sold to middle and lower-income families in record numbers. While they offer attractive and easy lending terms, they also include excessively high interest rates that can sharply spike, leaving new homeowners struggling to meet rising mortgage payments. ...

And have been friends of the people, in one way or another, for many years.

Charles Schumer, Senate website, 6/24/2004
Schumer announces dramatic $300 million expansion of oversubscribed Fannie Mae initiative letting middle class families purchase homes with little or no down payment at Long Island Housing Partnership on Monday

... Schumer today announced a $300 million expansion of an already-oversubscribed Fannie Mae initiative that lets middle class families in the New York metropolitan area purchase homes with little down payment. He also released a plan to convert one third of vacant federal property on Long Island for middle-class housing, and announced new legislation to make the Federal government insure zero-down-payment mortgages for first-time home buyers. ...

And guess who gets to stay in office because he first helped people buy homes they could not afford and later helped them stay in those homes?

 

[Sodbuster]

Short take: holders of common stock lose their money. Holders of preferred stock will be repaid. In other words, taxpayer dollars go to China and other Asian banks.

Angelo Mozilo hasn't given Countrywide executives a very good name. He's gone now, a very rich man. Between Countrywide and their new owner, Bank of America, I wouldn't believe a word they say.

Both political parties can share blame. Both look after their own interests. And yes, the economy is in bad shape and getting worse. I'm surprised at some of the comments on this board regarding the economy and how well it's doing.

Bank failures, OTC derivatives, hedge funds, bailouts, tanking dollar, energy and food costs going up, rising unemployment, wage stagnation, threat of not only high inflation but hyperinflation, M3 money supply is enormous, national debt at ridiculous levels, slumping car sales, retail sales down, bankruptcy rates up: what does it take for people to see what's happening?

 

[pnac]

It looks like retirement accounts (mutual funds) are going to be hit hard.

http://www.iht.com/articles/2008/09/07/business/treasury.php?pass=true

"Market discipline is best served when shareholders bear both the risk and the reward of their investment," Paulson said on Sunday. "While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."

Holders of the companies' common stock will not fare well. The plan suspends their dividend payments and holds the potential to make their shares virtually worthless if the government chooses to exercise its right to buy the common stock. The stock of both companies, which traded above $60 a share last year, had fallen below $10 a share recently. Their shares will continue to trade and could fall further as a result of the government seizure.

pnac

 

[JWT]

Not good news for anyone holding their stock or expecting dividends from their preferreds or bonds.

 

[LanceOregon]

Shoot, much of this is very bad news. I wonder how the stock market will react tomorrow?

Last week was already a rather bad week on the market.

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[JWT]

Not unexpected and the market probably has already factored it in.

 

[sasquatch]

The markets will probably react positively, as the takeover could help to stabilize the mortgage markets to some degree. Asian markets are up Monday morning in response. Hong Kong's benchmark Hang Seng index jumped 3.7 percent. South Korea's Kospi surged 4.5 percent. Japan's Nikkei 225 index was up 3.6 percent.

 

[LanceOregon]

It is sad that so many people are going to lose so much money over this. Yet, I found out that the CEO's of both Fannie Mae and Freddie Mac will come out of this very handsomely. They have golden parachute clauses in their employment contracts that will give them compensation packages worth $9.3 and $14.1 million dollars, respectively.

Tell me, why is it that in big business, CEO's still make millions, even when their companies fail??

It does not seem to be very logical, to me. Exactly what are they being rewarded for??

See:

http://www.nytimes.com/2008/09/08/business/08scorecard.html?_r=1&ref=business&oref=slogin
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[LanceOregon]

"It turns out that there is no magic way to put every American citizen, regardless of financial means or credit history, in a 3,000 sq ft home."

Alas, I guess that I am a failure in my life I suppose. My home is only 1,150 sq ft. in size. My parents had a 2,200 sq ft house, practically double what I have. The house that I bought while I was married was 1,600 sq ft, but my ex still lives in that house now.

But at least I own my current home free and clear, even though it is a small and cheap place. So I have no worry over the current mortgage crisis.

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[FireMax]

One thing is certain, and that is no-one knows when this will end. The media is being pretty silent about the importance of what is happening. Many banks have failed and many more are expected to fail within the next year or two. The problem is, the federal government basically has to "print new money" to cover the failures, which is leading to high inflation and devaluation of the dollar. It is a very precarious situation our economy is in, and neither obama or mccain are talking about it except to say "I feel your pain". I fear that neither one of them is prepared for what may be coming.

 

[xd9fan]

Isn't this due to Democrats forcing the banking industry to make home mortgage loans to those in their base who could not qualify?

both sides are to blame. Bush pushed to make home ownership ......too easy......all that owning the american dream talk.

 

[LanceOregon]

both sides are to blame. Bush pushed to make home ownership ......too easy......all that owning the american dream talk.

You mean that we cannot have a society where everyone is wealthy and well off? I thought that Americans were all supposed to be EQUAL???

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[TheBluesMan]

CEO's golden parachutes...

Sq. ft. of your home...

Blame Bush for this too...

Please keep this on topic before it, too, gets closed.

 

[Te Anau]

I'll tell you this,there's a lot of smoke-and-mirrors financial shuffling going on in 2008 America.Scares the hell out of me.