Daily Archives: May 13, 2010

Fannie + Freddie = Red Ink by Pete the Banker

Fannie Mae and Freddie Mac were major contributors to the housing bubble and ensuing real estate capital market collapse of 2007.  The Obama Administration and Democrat Congress have been pushing for financial reform for over a year and yet the pending Financial Reform Bill does nothing to reform either Fannie Mae or Freddie Mac who have consumed more TARP funds than any other failed entity with the exception of AIG. 
Freddie Mac announced a $6.7B quarterly loss and request of an additional $10.7B capital draw from the Treasury on Thursday.   Monday morning Fannie Mae announced an $11.5 Billion loss and the intent to draw another $8.4 Billion of TARP funds from Treasury.  

The amount drawn from Treasury TARP by both Fannie and Freddie now approaches $150 Billion while actual loss estimates by most experts’ far exceed even their capital draws from the Treasury (last Fall projected losses were close to $300 Billion).  In part these recent quarter losses are the result of accounting changes, FASB 166 and 167, requiring formerly off balance sheet assets (securitized mortgages for sale) to be accounted for by the two entities.  However, these losses also reflect significantly worsening delinquency and foreclosure problems at both firms. (here)   And remember, the Obama Administration essentially gave the former Government Sponsored Enterprises an open credit line to the Treasury last Christmas Eve.
 
McCain, Gregg and other Republicans have increasing expressed over frustration over the Administration’s dithering in reform of the Government Entities and are so far unsuccessfully are attempting to add amendments to the Financial Reform Bill.  Is the Administration really concerned with true financial reform or are they simply trying to exert more exhaustive control over the nation’s private banking system?  
While I am sure we can all rest more easily tonight knowing that the current legislation does heavily regulate unsecured lenders like payday loan and pawn shops, how will it avert future capital market crises? Fannie and Freddie in combination with the FHA now account for over 80% of all home loans and a majority of all recent home loan modifications, loans that display exceptionally high risk profiles when compared to historical real estate underwriting standards. 
Isn’t it time for the Administration and Congress to truly reform of the Financial System rather than simply providing ideological pabulum to their special interest contributors and generating headlines amongst the seemingly comatose mass media outlets?  Why is the Administration actively avoiding reform of Fannie Mae and Freddie Mac?
 
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