Looks like Freddie and Fannie needs Daddy’s credit card. With $5.3 TRILLION in combined mortgage debt (about 1/2 of the total mortgage debt in the United States), when Wall Street and the Feds begin to worry about Freddie and Fannie’s financial health, there is good reason to be concerned.
Freddie and Fannie are the MAJOR players in buying and guaranteeing loans in the secondary mortgage market. Well, last night the federal government moved on two fronts to shore up Freddie and Fannie and try an allay the markets before they open on Monday. First, the Treasury said it would provide additional liquidity as needed (Remember Bear Stearns?). Unlike the Bear Stearns melt-down however, Freddie and Fannie generally have not faced liquidity problems. But as their problems proliferate, there is always a danger that they might face funding difficulties, thus, the need for daddy’s credit card, just in case.
The feds also moved on another front – recapitalization. Freddie and Fannie are seriously undercapitalized. Freddie and Fannie are known as government sponsored enterprises ("GSE’s"). As GSE’s, Freddie and Fannie do not have to follow the same rules as others. Freddie Mac, for example, had about $16 billion in shareholder capital at the end of the last quarter, supporting $2.1 trillion in assets. Any real private financial sector institution operating with than kind of capitalization would be required to raise more money. But it seems that Freddie and Fannie don’t have to play by real rules because the government has their back. That is why Freddie and Fannie can exist in a world where all their assets are invested in the mortgage market – not the place to be right now, right?
Nonetheless, it is interesting to not that last week Fed Chairman Ben Bernanke and Henry Paulson, appearing before the House Financial Services Committee stated that the Office of Federal Housing Enterprise Oversight (Freddie and Fannie’s regulator), found both companies adequately capitalized. Indeed, Democrat Chris Dodd, the Senate Banking Committee Chairman also said that "Fannie and Freddie are in sound situation. They have more than adequate capital — in fact, more than the law requires. They have access to capital markets. They’re in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury as said as much."
The only thing stopping Daddy (Treasury/Henry Paulson) from extending credit is Congress. While this situation reeks of a potential bailout, the silver lining in all this is that Fannie and Freddie not only have a rich daddy, they happen to be backed by pretty decent mortgages, not the subprimes that tanked many mortgage lenders. Still, their shares have been battered, down nearly 45% last week. The real purpose in all this is to assuage market fear. The feds don’t want market turmoil, otherwise, the house of cards comes tumbling down.