Fannie Mae/Freddie Mac: What They've Done To Housing
Since I'm starting my holiday early today( I'll be back on Monday) I thought I'd provide you with an interesting take on all the Fannie and Freddienews from a good source of mine, mortgage consultant and former HUD official, Howard Glaser. What follows are this thoughts:
Fan and Fred have been viewed as firewalled off from the core of the subprime crisis. They are the "heart and soul" of the housing market, with a market that is comprised of prime, conforming loan product. Fannie holds about 2% in subprime, Freddie may 4 or 5%. Although it is unrealistic to have expected Fan and Fred to be completely immune from the broader developments in housing finance (and indeed their CEOs have been warning of this for some time), the reality of their losses drives home with finality that the prime mortgage market has caught the infection.
And because Fan and Fred are the backbone of the housing finance system, the hits they take are more troubling than the impact, say of an investment bank taking mortgage losses. You expect Merrill to jump in and out of the mortgage markets and it really doesn't matter because despite the shift of the past five years the market doesn't rely on them. But Fannie and Freddie have to be there, they have to be healthy, they have to be a predictable source of mortgage capital and when they are not that is a sign of real illness in the markets.
That said, the immediate Freddie problem is less than it looks. The proximate cause may be the losses, but the losses would not be as consequential if it didn't impact capital. And the reason there is a capital impact is that the Freddie regulator put a 30% surcharge on Freddie (and Fannie) in response to the accounting problems 3 years ago. So the reason Freddie needs more capital is that regulators are requiring more capital....at Freddie's normal capital level they would not have to be out there hunting for money.
When taken in conjunction with the cap on the portfolio that the regulator has also put in place, the real world impact of all of this is that Freddie (and Fannie too) are unable to pump additional capital into the mortgage markets when those markets most need it. (And which was the hope of last resort for the market). Bottom line...in a kind of twisted way, Fannie and Freddie's own regulator has created the current crisis with the capital surcharge.
The Freddie development also puts into deep freeze Congressional attempts to raise the fannie/freddie loan limits and the portfolio cap. Just this past week, (Sen Charles) Schumer and others were working on passing these provisions. That will be over for a while.
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