Fannie Mae - GSE

Update - 2008-09-08: From $68.00 to 68 cents in less than one year. Shares of Fannie Mae closed today at 73 cents, and are still dropping in after-hours trading. To close this chapter, we will now coin the term GSE - Gov't. Supported Enterprise.

Original Implode Listing - 2008-09-08, 11:15am EST: In an historic move that virtually wipes out the stockholders of Fannie Mae, the government has taken over the reins and purse strings of both mortgage giants. The American taxpayer is now on the hook for losses yet to be seen, in what many media outlets are calling "the chickens have come home to roost."

After finding evidence of "inflated" but legal accounting moves which effectively hid the extent of the trouble, the government has placed Fannie Mae in what is effectively a Chapter 11 bankruptcy.

The Federal Housing Finance Agency (FHFA) has been appointed as the Conservator, with CEO Daniel Mudd being replaced by Herbert Allison, former CEO of TIAA-Cref.

For a Q&A on the Conservatorship, click here. For the full statement from FHFA Director James B. Lockhart, click here. For the full text of Paulson's Statement, click here.

Reuters reports Standard & Poor's on Sunday cut the ratings on Fannie Mae (FNM.N) preferred stock to junk status after dividends were eliminated in a takeover by the U.S. government.

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 - 2008-08-27: Trading in preferred shares of Fannie Mae (FNM) were halted after-hours today, as pending news of a management restructuring was announced. CNBC reported President and CEO Daniel Mudd said the executive appointments were effective immediately. David Hisey is the new Chief Financial Officer (CFO), Michael Shaw was named as the new Chief Risk Officer (CRO), and Peter Niculescu will assume the role of Chief Business Officer.

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 - 2008-08-08: Two days after sibling Freddie Mac reported second quarter losses and slashed dividends, Fannie Mae announced a staggering $2.3 billion loss -- nearly four times what had been anticipated -- and also cut its quarterly dividend to five cents. Bloomberg reported that they plan to "double an upfront fee for guaranteeing mortgages to 50 basis points" and will cease purchasing Alt-A mortgages by year's end.

Loss provisions increased to $3.7 billion, delinquencies were up to 6.53%, and foreclosures rose to 2.47%. Alt-A loans and other investments accounted for 60% of the losses. Stock prices fell as much as 19% and were trading in single-digit territory at a mid-morning low of $8.19. From an article on CNN Money:

"The housing market has returned to earth fast and hard," Fannie Chief Executive Daniel Mudd said in a conference call. He said uncertainty about the market made it impossible to say "what inning we're in" or when prices would reach bottom.

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.