Fannie And Freddie Skating On Thin Ice

Fears Grow That Taxpayers May Have To Bail Out Country's 2 Biggest Mortgage Finance Companies

(CBS/ AP)  Wall Street and Washington wrestled Friday with how to shore up mortgage giants Fannie Mae and Freddie Mac, two troubled pillars of the economy whose failure would deal a devastating blow to the already crippled housing market.

As investors grew more convinced that only some type of government bailout could rescue the firms, Treasury Secretary Henry Paulson said the focus was to support the pair "in their current form" without a takeover.

The government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.

A Fed spokeswoman said the central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.

Both companies issued statements late Friday calling their financial positions solid. Freddie Mac said it did not see an immediate need to raise fresh money, and said other options included cutting its annual shareholder dividend, which costs $650 million a year.

Investors drove Fannie and Freddie shares to 17-year lows before the stocks recovered somewhat. The turmoil, combined with a new high for oil prices, helped send the Dow Jones industrials briefly below 11,000 for the first time in nearly two years. The Dow finished down about 1 percent at 11,100.54.

Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers. Shares of both companies are publicly owned.

When people buy homes, they usually take out a loan from a bank. The bank will then sell that loan to Fannie or Freddie, who in turn repackage the mortgages and sell them to investors. They also guarantee the mortgages will be repaid, reports CBS News Business correspondent Anthony Mason.

Their importance to the housing market and overall economy is hard to overstate: Fannie and Freddie either hold or back $5.3 trillion of mortgage debt, or about half the outstanding mortgages in the United States.

"If they did (go under), the mortgage market would break down and it would be 1929," Peter Morici, a University of Maryland economist, told CBS News. "We would go from a recession into a depression."

In the mortgage industry, the prospect of doing business without Fannie and Freddie is truly frightening.

"The cost of borrowing would go up dramatically," said Steve Habetz, president of Threshold Mortgage Co. in Westport, Conn. "We would be going back to dark ages where a homebuyer would be hoping that a local bank would (have enough resources) to make the loan that it will keep on its books."

Published reports suggested the government was considering taking over one or both of the companies and running them itself.

President Bush met with senior economic advisers and said Paulson had assured him that Paulson and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard."

The men running for president also addressed the mortgage crisis. John McCain said he supports some kind of government assistance to keep Freddie and Fannie from going under and Barack Obama said in a statement that all necessary steps should be taken, reports CBS News Chief White House correspondent Jim Axelrod.

Wall Street sent the companies' stocks lower nonetheless. Freddie Mac shares were down 25 cents, or 3.1 percent, to $7.75. Fannie Mae shares were down $2.95, or 22.4 percent, to 10.25.

Both stocks have stabilized for now, but all this uncertainty may hike the cost of borrowing money until a plan's in place, reports Axelrod.

"I think everybody's just holding their breath in expectation that something substantive from the government will happen today or over the weekend," said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics.

Analysts also suggested the problems had as much to do with market perceptions than any fundamental change in the two companies' finances. One report from Citigroup titled "Fear Begets Fear" called the sell-off "overdone."

The government has several options that stop short of a dramatic takeover. The Federal Reserve could provide emergency loans, or take on either company's mortgage-backed securities in an effort to reassure the market.

Under a government takeover, operations would continue at Fannie or Freddie, but shareholders would probably see their investments erased, and the companies' ability to support the mortgage market could be reduced.

"Typically when this happens the business is a shell of its former self," said Louisiana State University banking professor Joseph Mason. "Shareholders aren't going to like it, managers and directors aren't going to like it, but it's not about whether they like it."

The mortgage giants could face a replay of the near-collapse in March of investment bank Bear Stearns Cos. A crisis of market confidence can make it difficult to raise day-to-day operating cash through routine debt sales.

The chief regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, said on Thursday that the two companies were "adequately capitalized."

Congress created Fannie, the Federal National Mortgage Association in 1938 and Freddie, the Federal Home Loan Mortgage Corp., in 1970. They were designed to buy mortgages and bundle them into securities for sale to investors worldwide, making home ownership affordable for more Americans.

Under a 1992 law, they have less strict standards than commercial banks for the financial cushions they must hold to protect against risk.

Paul Miller, an analyst with Friedman, Billings, Ramsey & Co., said neither company is in as dire a financial position as Bear Stearns was in the spring - making investors nervous no action will be taken over the weekend to shore them up.

He said Fannie and Freddie could soothe market fears by selling more shares of stock to investors and raising cash. "I hope that they raise capital and they raise a lot of it," he said.

Congress is moving closer to completing a housing rescue package that would create a new regulator for Fannie and Freddie and tighten controls over them. The bills would also permanently raise the limit on the loans they can buy.

[jydavis1]

Captain ! the empire collapse sequence has been initiated ..

[floydzepp5]

Just reads where the Treasury Secretary has decided on a bailout plan for Fannie and Freddie. Look,ma! Welfare for the Rich!

[beehive21-2009]

So, aah, whom is going to bail out the taxpayers ?

[wardoglrs]

Guy''s c-mon there doing there best to get more empty homes for the poor so they can have a place to sleep.

[ringading3]

Thank You Senator Charles Schumer for the RUN on IndyMac!

[whitemale08]

Operation Transrectal-

Folks, what could very well be happening today is that a couple of Frankenstein doctors known as Republican Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke are attempting to transplant the compound *** tissue of JP Morgan, Citibank, Goldman Sachs, and other big banks that make up the Federal Reserve System to that of an already dying patient the U.S. Taxpayer.

The new *** will be located at the rear end of Freddie Mac and Fannie Mae a siamese twin quasi private government underwriter.

This will allow the banks to quickly trans-digest all of their worthless mortgage back paper securities over to Fannie & Freddie so that they can take a $10 trillion dump on the American people.
If the operation is successfull then you will see hyper-inflation like you never seen it before and that will be the equivalent of pulling the plug from the life support of our economy.

Paulson & Ben Bernanke do not care anymore for you or your family or the world for that matter.

They only care about the Republican party, electing John Insane and ensure their tax cuts at the expense of hard working Americans.

It''s that simple folks, let''s the operation is unsuccessful.

[brianbwb-2009]

"what is wrong brianbwb..dont you want to save the world??" Posted by libsluv2spit

Did someone call me? I just popped into work here, check the news, and see this.

With people like "libsluv2spit" in the world it makes it tough to want to save all of it, maybe such as them we could well do without.

Having said that however, I am in opposition to those who hypocritically condemn inhumanity when committed by others, but do exactly the same, then try to make excuses and exceptions.

I also oppose those who advocate policies that negatively affect me and mine, for trivial reasons, such as the illusion called "race", or political affiliation, etc.

I guess the biggest difference between us is that I see what is wrong, and call to make it right, whereas you don''t see what is wrong, and when it is pointed out, make lame excuses for it, and seem to actually enjoy the wrong.

I count the dead and distressed humanity of Iraq, and the lost lives of US soldiers as the result of crime against humanity, you see it as your "hero" display of "machismo", and totally disregard the lives lost.

I condemn economic corruption as the cancer of capitalism, you celebrate it as the core value of capitalism.

So whatever your question was that made you call my name, is that answer enough?

[rosemari2]

We all better get a good hold and sit down deep, ''causse this is going to be a rough ride.

I went though this when I was 12 years old, in a farm speculation Recession and again in the 80''s Farm Crisis brought on by WONDERFUL Ronald Reagan-------the Deregulation King. This is going to be worse, and why can''t we get the hell OUT of Iraq and the entire Middle East and take care of our own problems? Why? cause we have sold ourselves down the river looking for cheap *** from China.

[sparks224]

I''m just glad we finally got rid of all those d.a.r.n government regulations.

[sparks224]

I''m just glad we finally got rid of all those *** government regulations.

[underdogus01]

the great depression may be round the corner...

[deacon20081]

The investors who buy shares of Freddie and Fannie are no doubt Arabs by a huge margin. Let them loose their collective arses. I say no bail out for the "investors" you roll the dice you take the odds you get. They are raping us in the Oil markets, turn about is fair play.

[libsluv2spit]

this is the part where the liberals will start to slither away..BECAUSE IT WOULD COST THEM MONEY..

what is wrong brianbwb..dont you want to save the world??

[pjones501]

*In this time of crisis, we need the Best.

We need Experience. We need Hillary and Bill.

Under the Clinton administration, the average income went from $43,000 to $49,000 a year. The budget was balanced and inflation, including oil and gas prices, were kept in check.

We can still have Hillary.

It IS up to US. All we have to do is let it be known that Hillary backers are NOT going to vote for Obama under any condition. Thats all it takes. If we don''t play thier game with them, there is no game and the candidate that most Democrats cast their votes for in the Primary will be the next President of the United States.
Write in Hillary''s name on the November ballot. Call your local voting place,
(on your registration card) and find out if you have to do anything special to receive a write in ballot. In some states you have to be registered as an
Independent. Do this before October 1st.

REMEMBER!! Obama is just the "presumptive" Democratic Candidate. The Super

Delegates, who can change their votes right up until the last minute, can

still make Hillary Clinton the Democratic Candidate at the Democratic National

Convention in August.

LET THEM KNOW YOU WANT HILLARY!!!!!

[slim1h2o]

"Trickle down" economics at its predicted outcome.

Posted by brianbwb at 09:44 AM : Jul 12, 2008

I agree,,Ain''t this coutry great or what?

BTW,,That was Whitewater,, if I''m not mistaken. Brought to you by the Clintoons!

[brianbwb-2009]

"Yes, I did forget about them, I shouldn''''t have though, Countrywide beat me out of an extra payment on my house when I had to sell, back in 2005. (to add insult to injury) I''''m not sorry to see them go."
Posted by slim1h2o

Also it might help to realize that this is the logical consequence of the S&L bailouts of an earlier administration, Banks learned that they could steal all the money they could get their claws around, pass a few tips around in DC, and get bailed out when the banks went belly up.

"Trickle down" economics at its predicted outcome.

[slim1h2o]

No it isn''''t the first, remember Countrywide?

It won''''t be the last either, by far.

Posted by brianbwb at 09:01 AM : Jul 12, 2008

Yes, I did forget about them, I shouldn''t have though, Countrywide beat me out of an extra payment on my house when I had to sell, back in 2005. (to add insult to injury)
I''m not sorry to see them go.

[brianbwb-2009]

"...Maybe." Posted by slim1h2o

No it isn''t the first, remember Countrywide?

It won''t be the last either, by far.

[slim1h2o]

A bank in Indiana just failed, IndyMac. Is that the 1st domino to fall?

Maybe.

[brianbwb-2009]

Posted by DemWatcher

And so by definition MCVet is absolutely correct in the assesment of the Republican party as fascist.

Of course you will try to ascribe your own definition to the word, true to the assertion in the statement,

"Fascism adopts a certain kind of %u201Cvoluntarism;%u201D they believe that an act of will, if sufficiently powerful, can make something true. Thus all sorts of ideas about racial inferiority, historical destiny, even physical science, are supported by means of violence, in the belief that they can be made true. It is this sense that Fascism is subjectivist.