Are we there yet? Signs point to yes.
The New York Times said the administration of President George W. Bush is weighing the possibility of having to place one or both companies (Fannie Mae and Freddie Mac) in a conservatorship to protect them from the snowballing collapse of the US mortgage finance market. The Wall Street Journal, which first reported Thursday that the Bush administration was weighing strategies to keep the firms afloat, said Friday that pressure was on them now to raise fresh capital. Treasury Secretary Henry Paulson, in a brief statement, offered no indication of any imminent intervention.
“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said. “We are maintaining a dialogue with regulators and with the companies.”
Under a 1992 law, if either is seen as being severely undercapitalized, it may be placed into government conservatorship. Thank you, Bill Clinton!
One research note this week said the two firms may have to raise tens of billions of dollars in fresh capital under new accounting rules to offset massive losses in their home loan portfolios.
The two firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them into securities sold to investors. But the horrific housing slump has led to billions of dollars in losses for the firms.
Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae’s is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States. (About 2.12% of them are either in default or foreclosure this month.) The prospect of insolvency for the so-called government-sponsored entities or GSEs could send more shockwaves through the global financial system because of the size of the companies, and the notion of a bailout has prompted heated debate.
FLIPBOARD Readers:
Look for the US Dollar to move on the news of the decision the government makes. Also, once the GSE’s go, the housing market tanks completely. At that point, we have hit the bottom!
