Realty Check

Fannie And Freddie And Fixing What's Broke

Fixing Whats Broken

After a few days of being under the weather--I'm back on the beat this week. Here we go.

On Saturday morning, when most of us where headed off to soccer or gymnastics or the hardware store, Fannie Mae and Freddie Mac were officially getting their portfolio caps lifted. Fabulous, right? Exactly what they’d been pushing for, as the government-inspired, if not actually backed, entities are seen as sort-of saviors of the mortgage market. The cap lift is designed to allow Fannie and Freddie more room to maneuver when it comes to investing in the housing market.

But times they have a-changed, and Fannie and Freddie are not exactly in the position they once were. Despite the lift in the portfolio caps, they simply can’t play business-as-usual. Even Freddie’s Chief last week told investors: “We’re treating capital a little bit like a scuba diver treats oxygen.” Yipes, in my professional opinion.

Paul Miller, over at FBR, still has Freddie at “underperform,” because, “We believe that the GSEs will continue to have trouble with both credit losses and capital levels and recommend investors continue to stay away from the two companies.” He just doesn’t think there will be any earnings upside in the next few quarters, even with the OFHEO cap relief.

Fannie’s chief last week told investors the company would be doing more mortgage securitizing for sale to others rather than investing in mortgages itself. It’s whatever needs less capital. OFHEO is going to relax that 30 percent capital cushion over the next year, but not by a lot. So if everyone thinks the GSEs are suddenly going to save the mortgage market, well remember, they need to survive like everyone else.

Questions?  Comments?