The big buzz in the news about the housing market on Friday (7/11) concerned the solvency of Fannie Mae and Freddie Mac. Specifically, on Friday the stocks of both companies plummeted to their lowest levels in 17 years and both have sustained huge losses in their loans portfolios - about $11 billion over the past few months. There is great concern that both may be on the financial brink due to the housing market crisis. 
Some of the talk in the news was about a government bailout to rescue both companies; however, such talk appears to be premature. Fannie Mae and Freddie Mac, both of which are GSEs (government sponsored enterprises) issued separate statements yesterday saying that their financial position is solid. However, Senator Christopher Dodd indicated that times are tough for both corporations and said that the government was considering an emergency lending program as a possible option to prop up the firms, if necessary. Senator Dodd also said he has discussed this with Treasury Secretary Paulsen and Fed Chairman Ben Bernanke.
So, how severe is the financial picture for both of these companies? Well, Senator Dodd stated on Friday “these institutions are fundamentally sound and strong.” He also said “there is no reason for the kind of [stock market] reaction we’re getting [concerning both companies]. Treasury Secretary Paulsen stated that a bailout of both companies is unlikely despite the concerns and reaction that the stock market is currently having. Paulsen also said that the primary goal remains to support both GSEs in their current form (as opposed to becoming nationalized companies). There are, in fact, several options of assisting both these institutions, when it comes right down to it, prior to any potential scheme for a bailout.
The New York Times on Friday stated that the administration was considering a plan to put both Fannie Mae and Freddie Mac into a conservatorship if their problems worsened. The purpose of such a plan would be to appoint someone to run these institutions and get them out of financial trouble. The accuracy and/or context of the information in this report is not certain.
Yet, Freddie Mac issued a statement that it has options to weather the financial storm. They stated that they could cut the dividend on its stock allowing it retain capital. Fannie Mae also stated that it has access to “ample sources of liquidity”.
The spokeswoman for the Federal Reserve, Michelle Smith, said the central bank is keeping a close watch on the situation. The fed has also said that, as of yesterday, they have not discussed the current situation or different financial backing options with either corporation.
There is a very good possibility that some sort of financial game plan/safety net could be put in place for both Fannie Mae and Freddie Mac sometime within the next few days. If this happens it could indicate that the situation for both GSEs is dire or it could simply mean that a prudent contingency plan is put in place just in case it is needed.
It is extremely unlikely that Fannie Mae and Freddie Mac are on the ropes. However, they are under duress due to the foreclosure of so many loans, the steep decline in their stock price, and the constraining pressure of available capital. Rest assured, the government would never let them go belly-up because they underwrite or outright hold about 50% of all the mortgages in the U.S. Stay tuned for continuing developments on this story in the days ahead.
Some of the talk in the news was about a government bailout to rescue both companies; however, such talk appears to be premature. Fannie Mae and Freddie Mac, both of which are GSEs (government sponsored enterprises) issued separate statements yesterday saying that their financial position is solid. However, Senator Christopher Dodd indicated that times are tough for both corporations and said that the government was considering an emergency lending program as a possible option to prop up the firms, if necessary. Senator Dodd also said he has discussed this with Treasury Secretary Paulsen and Fed Chairman Ben Bernanke.
So, how severe is the financial picture for both of these companies? Well, Senator Dodd stated on Friday “these institutions are fundamentally sound and strong.” He also said “there is no reason for the kind of [stock market] reaction we’re getting [concerning both companies]. Treasury Secretary Paulsen stated that a bailout of both companies is unlikely despite the concerns and reaction that the stock market is currently having. Paulsen also said that the primary goal remains to support both GSEs in their current form (as opposed to becoming nationalized companies). There are, in fact, several options of assisting both these institutions, when it comes right down to it, prior to any potential scheme for a bailout.
The New York Times on Friday stated that the administration was considering a plan to put both Fannie Mae and Freddie Mac into a conservatorship if their problems worsened. The purpose of such a plan would be to appoint someone to run these institutions and get them out of financial trouble. The accuracy and/or context of the information in this report is not certain.
Yet, Freddie Mac issued a statement that it has options to weather the financial storm. They stated that they could cut the dividend on its stock allowing it retain capital. Fannie Mae also stated that it has access to “ample sources of liquidity”.
The spokeswoman for the Federal Reserve, Michelle Smith, said the central bank is keeping a close watch on the situation. The fed has also said that, as of yesterday, they have not discussed the current situation or different financial backing options with either corporation.
There is a very good possibility that some sort of financial game plan/safety net could be put in place for both Fannie Mae and Freddie Mac sometime within the next few days. If this happens it could indicate that the situation for both GSEs is dire or it could simply mean that a prudent contingency plan is put in place just in case it is needed.
It is extremely unlikely that Fannie Mae and Freddie Mac are on the ropes. However, they are under duress due to the foreclosure of so many loans, the steep decline in their stock price, and the constraining pressure of available capital. Rest assured, the government would never let them go belly-up because they underwrite or outright hold about 50% of all the mortgages in the U.S. Stay tuned for continuing developments on this story in the days ahead.
Factoid: Congress created Fannie Mae (the Federal National Mortgage Association) in 1938 as well as Freddie Mac (the Federal Home Loan Mortgage Corporation) in 1970 to buy mortgages and bundle them into securities for sale to investors in order to create and maintain a stable and affordable housing market in United States.
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