Freddie Mac - GSE

Update - 2008-09-06: The Wall Street Journal today is reporting Rep. Barney Franks has confirmed Paulson is stepping in, "a move that would essentially result in a government takeover of the mortgage giants" according to the article.

Update - 2008-08-19: Reported today in Market Watch:

"It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses."

Section 1117 of H.R. 3221 (entitled the "Housing and Economic Recovery Act of 2008"), gives the Secretary of the Treasury an "emergency blank check" to purchase securities and/or obligations of the entities (authority expires 12/31/2009), with certain expectations of repayment. One subsection ironically states the purpose of such an emergency determination is protecting the taxpayer.

In late-day trading, shares in Fannie Mae (FNM) and Freddie Mac (FRM) were both near or below their 52-week lows.

"Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends."

Update - 2008-08-09: Within hours of Fannie Mae on Friday, Freddie Mac announced it was matching Fannie's October 1 delivery fee changes effective November 7. A tipster pointed out, "They're also increasing their A-minus/Caution and investor delivery fees."

Update - 2008-08-06: Loss provisions against single family home loan guarantees tripled in the second quarter, costing Freddie Mac $1.4 billion. CNN Money reported a total loss for the quarter of $821 million, and dividends will be slashed to 5 cents per share or less. Stock in FRE tumbled mid-morning by more than 17% to $6.63 a share.

Update - 2008-07-23: Freddie Mac took a unique (among the GSE's) step last Friday 2008-07-18, and announced it had registered with the SEC.

"Becoming an SEC registrant marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting," said Chairman and Chief Executive Officer Richard F. Syron. "It demonstrates the continued progress we've made to strengthen Freddie Mac's foundation and ensure that we can continue to serve our vital housing mission. It is important to note that this registration statement does not relate to an offering of securities."

Also reported was that Freddie Mac "has committed to its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), to raise $5.5 billion of new core capital through one or more offerings, which will include both common and preferred securities." OFHEO had established a mandatory target surplus of 20%.

From Option ARMegeddon:

"They've been allowed to expand their portfolios, which increases profits for shareholders, without expanding the capital cushion that protects taxpayers (who bear ultimate responsibility for the implicit government guarantee backing the company's debt)."

Some would say the ultimate Lender Implosion would be impossible. To suggest the two largest pillars of the American Mortgage system, Fannie Mae and Freddie Mac would Implode could be next to treasonous. But here we are on the brink.

In early trading today, already down 30% on the week, FNM and FRE initially dropped over 45% of their value... the last bastions of liquidity in a troubled Mortgage Industry, in a troubled economy.

Back in January of this year, Rolfe Winkler (reporting for the Baltimore Sun) wrote the following, which could be read like it was this morning's news:

"Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world - set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize."

From a July 11 Bloomberg article quoting the New York Times:

"The government is discussing placing them in a conservatorship, under which the companies' shares would be worth little or nothing and losses on mortgage holdings would be covered by taxpayers, the Times said, citing unidentified officials briefed on the matter. Their shares are plunging and their borrowing costs are rising as investors worry the companies will suffer losses larger than the $11 billion they have lost in recent months, the Times said."

According to another Bloomberg article, "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair-value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said."

We leave this as the foundation listing on the Implode-O-Meter, and updates for each company will be dated above.

For the latest Discussion Forum on Fannie/Freddie, try here. Comments are always welcome.