Government Takover of Fannie, Freddie Hasn’t Worked

By: PAUL JACKSON
October 29, 2008 7:37 AM CST

It’s a subject we’ve covered with some gusto in recent weeks here at HW — due in no small part to my own personal loss on Freddie Mac’s common stock — but it’s clear that the government’s rationale for taking over both GSEs has been anything but successful so far. This morning’s WaPo takes a good look at some of the same issues we’ve already covered, but are worth hammering home again:

Backed by taxpayers, the mortgage finance giants have spent billions in an attempt to push down loan rates and make it easier for people to borrow money to buy homes. But mortgage rates have gone up.

The Treasury Department has also started buying $10 billion in mortgage bonds issued by the companies, with the ultimate goal of ensuring that mortgage lenders have a ready stream of money to lend. But the effort has been offset by a global sell-off of these bonds.

The WaPo’s Zachary Goldfarb clearly had the good sense to speak with Jim Vogel, perhaps my favorite financial analyst in any market, about what’s been taking place with the GSEs. The message is one that every investor and mortgage market participant should be paying attention to:

To increase their portfolios, the companies borrow money. The problem is that they have been able to borrow only at higher rates because of investor anxieties over the credit markets generally and the fate of the companies specifically. This in turn has constrained their ability to borrow. The companies will issue $16.3 billion in debt this month, compared with $32.7 billion last month, according to Jim Vogel, an analyst at FTN Financial Capital Markets. That’s the lowest level in at least eight years.

With borrowing costs so high, Vogel said, the companies may no longer be earning enough from mortgage investments to cover their costs. That means Fannie Mae and Freddie Mac may find it more difficult to fund themselves.

“The market doesn’t want to buy the debt of a gigantic financial institution that’s funding its assets at a loss, regardless of how the U.S. government may or may not be standing behind them,” he said. [emphasis added]

Which leads us back to the government, again. Why did they take these companies over, again? Perhaps the most disingenuous remarks I’ve seen yet about the takeover are coming from FHFA director James Lockhart (and I’m sure I’m not going to make any friends with the press folks over at the FHFA for saying that). Immediately after the government siezed both companies, he argued that the GSEs’ “ability to fulfill their mission has deteriorated” and said that “the capacity of their capital to absorb further losses while supporting new business activity is in doubt.”

Yet today we find him in the WaPo saying the following:

“The key thing to me is that Fannie and Freddie can and are continuing to fund themselves,” he [Lockhart] said. “I think there will be ups and downs. Over the long term, we’re very hopeful that Fannie and Freddie can continue to supply the liquidity to the housing market.”

The thing is, Fannie and Freddie can and would have continued to fund themselves without government intervention. I can’t say this enough. So remind me again why investors needed to be wiped out? Sure, I’m bitter about losing a good chunk of my investment, but I think it’s a fair question for any taxpayer that’s now “effectively” guaranteeing the debt and mortgages held by the GSEs.