Mortgage Industry News

by Mary Kladde

Fannie Mae and Freddie Mac recently took to Capitol Hill to defend enormous executive bonuses after Congress voted to subject GSE employees to the federal pay scale.  Seriously?  The price tag for the GSE bailout is estimated to be $169 billion and counting, as losses continue to mount.

In the real world, at least among small to mid-size companies which represents the backbone of the US economy, if your company isn’t making a profit, you don’t get paid, much less are you rewarded with bonuses.   You tighten your belt or go out of business!  I’m not sure why the GSEs and Wall Street don’t work this way.

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From Business Week:

Freddie, Fannie cut back mortgage fees
By ALAN ZIBEL
WASHINGTON

Mortgage finance companies Fannie Mae and Freddie Mac, seized by the federal government last month, are rolling back fees imposed as they struggled to shore up their finances over the past year.

Freddie Mac said Friday it would not impose a fee increase scheduled to go into effect next month. The announcement followed a similar reversal by Fannie Mae Thursday night.

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While I am not as confident as Bill Gross in the efficacy of handing the “keys to the kingdom” over to Paulson and Bernanke with no oversight or ability to challenge in court,  he is one of the more interesting characters as Founder and Co-CIO of PIMCO, the world’s largest holder of MBSs.

Ruth Lee

More doom and gloom? Money and Markets ran a comprehensive article last week outlining the future of Washington Mutual, Wachovia and the economy’s general direction:

“Much of our nation’s financial structure is collapsing, and our government’s only response is phony money, bogus bailouts and a litany of false promises.

Ben Bernanke, Henry Paulson, the FDIC and the U.S. Congress say they can do it all.”

Washington Mutual in a Death Spiral? 

“Washington Mutual, America’s largest savings and loan, is unfortunately, also one of the nation’s largest subprime lenders. A direct consequence: It appears to be in a death spiral, losing $3.3 billion in the second quarter … admitting to losses of as much as $19 billion this year … and probably on its way to losses of an estimated $26 billion.

That estimated loss is over four times its total market value as of Friday’s close … twelve times its yearly earnings in the best of times. Can it get a new capital infusion to stave off failure?”

Click here to read the full article.

Fannie, Freddie update from today’s MBA NewsLink:

“The resurgence of Fannie Mae and Freddie Mac’s share prices has been aided by the Treasury’s plan to prop up the companies and the Securities and Exchange Commission’s rule to restrict short selling. However, the moves by the federal government do not solve the underlying problems of Fannie Mae and Freddie Mac, including their low levels of capital compared to other financial firms. Critics of the government-sponsored enterprises have spent the past decade arguing that they need to boost their capital to guard against a collapse, which would cause serious problems for the financial markets. Fannie Mae and Freddie Mac face the challenge of building up their capital reserves, but it leaves them with less money to fulfill their mission to support the mortgage market.”

Read the full article from the Washington Post.

Ruth Lee 

The Congressional Budget Office announced its findings on the Congressional housing legislation set for a reluctant vote this week.  While the CBO had previously estimated that the housing package would earn income for the government, their estimates have changed to a whopping $25B price tag for the federal government over the next two fiscal years.

Why?  The Treasury Department and Paulson are pushing to include language in the legislation allowing the Treasury to buy an unlimited amount of GSE debt to ensure liquidity for Fannie and Freddie in cases of emergency.  While the CBO argues that there is a better than 50% chance that the expanded authority of the Treasury would never be used (it expires December 2009), even they can’t argue for best case scenario.  Pimco manager Bill Gross even doubts that it won’t be exercised.

Ruth Lee

Bloomberg ran a great article this week giving some industry perspective and feedback on the recent Fannie Freddie Bailout initiative. Bill Gross, founder of Pimco, which has historically been a big buyer of Fannie and Freddie bonds, calls Paulson’s plan “crucial” to the GSEs and the mortgage and investment markets.

“July 21 (Bloomberg) — Bill Gross, who manages the world’s biggest bond fund, said it’s not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department’s support.

“Let’s be blunt: to the extent the Treasury suggests they’ll never have to use their authority, that’s a sham,” said Gross of Pacific Investment Management Co. “It’s fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don’t think that’s possible.”

The article later reports:

“Housing prices will fall another 10 percent to 15 percent over the next 12 months, making it a mistake for policy makers to raise borrowing costs to curb inflation, Gross said. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.”

Click to read the full article “Pimco’s Gross Says Fannie, Freddie Need Treasury”.

Gross also commented that he considers Fannie and Freddie’s mortgage products to be good investments. To see Bloomberg’s interview with Gross, click here.